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Chapter 23: Q 23 (page 577)

What is included in the current account balance?

Short Answer

Expert verified

Current account balance is one of the three components of balance of payments. There are four major components included in current account balance.

Step by step solution

01

Step 1. Goods 

Imports and exports of goods only. These include objects physical in nature and are movable. It is basically transfer of ownership form domestic country of buyer of outside country.

02

Step 2. Services

Intangible actions such as transportation services, royalties and licensing. money that is received for a service is import and spent on a service is export. When imports exceed exports its trade deficit service and when exports exceeds it is trade surplus service.

03

Step 3. Income

Money that is coming in or out of country in form of salaries, portfolio investments or any type of investment. Income work as a fuel for function of the economy

04

Step 4. Unilateral transfers

transfers also known as current transfers These include workers' remittances , donations, aids and grants , pensions. It is when transfer of money is done from one country to other without receiving good and services of any kind in return.

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Most popular questions from this chapter

Does a trade surplus help to guarantee strong economic growth?

How does the bottom portion of Figure 23.3, showing the international flow of investments and capital, differ from the upper portion?

If a country is running a government budget surplus, why is (T – G) on the left side of the saving-investment identity?

Why does the trade balance and the current account balance track so closely together over time?

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1%of Germany’s GDP; private savings is 20%of GDP, and physical investment is 18%of GDP.

a. Based on the national saving and investment identity, what is the current account balance?

b. If the government budget surplus falls to zero, how will this affect the current account balance?
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