16/11/15
Lesson 1: Current, Financial and Capital Account
Learning Objective: I can determine the difference between the current, financial and capital accounts.
DA: What is the main transaction in the current account?
DA: What is the main transaction in the current account?
Current Account
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Financial Account
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Capital Account
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Based on the accounts above, determine the account in which each of the following transactions is recorded for the country in bold as well as whether it is recorded in credit or debit item.
- A Dutch multinational builds a new factory in China.
- A South African supermarket imports wine from Chile.
- A Swiss pharmaceutical corporation pays the salary of an executive working in Turkey.
- Greek parents pay for their daughter to study at a UK university.
- The brand name Goody's is sold to a Burger King, a US fast food company, from its current Greek owner.
- A Mexican migrant worker in the US sends part of her salary back home to Mexico.
- A Malaysian insurance company buys US stock and US bonds.
- A Swedish multinational corporation buys insurance from Cypriot insurance broker.
- Emirates Airlines (Dubai) buys jet fuel at the El Venizelos airport of Athens, Greece.
- An Australian mining company sells mineral rights to a German company.
- A Russian entrepreneur buys shares of a US company that entitles his to 50% of the voting power in the company.
Relationship between current account and exchange rate:
Deficit in the current account may result in downward pressure on the exchange rate.
Deficit implies an excess of supply of the currency on the foreign exchange market.
- Demand for exports has fallen.
- Demand for imports has increased.
- Supplying more domestic currency to the world.
- Exchange rate should fall thus improving the competitiveness of the country's exports.
Surplus may result in upward pressure on the exchange rate.
- Excess demand for the currency on the foreign exchange market.
- Demand for exports has risen, as has the demand for the currency.
- Demand for imports has fallen.
- Exchange rate should rise, decreasing the competitiveness of the country's exports and lowering the domestic price of imports.
Activity: Using the following website, http://data.worldbank.org/indicator/BN.CAB.XOKA.CD, identify a country and whether or not they have a BOP surplus/deficit, explain why. Analyze any correlation between their surplus/deficit and exchange rate.
- Identify a country.
- Identify and explain why they have a BOP surplus/deficit.
- Analyze any correlation between the currency and BOP.
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