Chapter 18 Summary:- A country’s balance of payments accounts summarize its transactions with the rest of the world. The balance of payments on current account, or current account, includes the balance of payments on goods and services together with balances on factor income and transfers. The merchandise trade balance, or trade balance, is a frequently cited component of the balance of payments on goods and services. The balance of payments on financial account, or financial account, measures capital flows. By definition, the balance of payments on current account plus the balance of payments on financial account is zero.- Capital flows respond to international differences in interest rates and other rates of return; they can be usefully analyzed using an international version of the loanable funds model, which shows how a country where the interest rate would be low in the absence of capital flows sends funds to a country where the interest rate would by high in the absence of capital flows.
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