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The Link between the Current Account and Changes in a Countrys Net Foreign Wealth - Term Paper Example

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The author of the "Link between the Current Account and Changes in a Country’s Net Foreign Wealth" paper states that no actual returns are expected from transfer payments since the principle merely entails to redistribute wealth for the purpose of spending…
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The Link between the Current Account and Changes in a Countrys Net Foreign Wealth
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Download file to see previous pages Factor Income is the return or income of a particular asset an example of which is the income derived from land or the rent paid by its occupant. Net Transfer Payment is the liability of the government in financing its operation or the difference between the required payments needed to finance social services or other similar government functions and the availability of funds coming from the income of the government.

Before giving illustrations and meaning to each of the economic phrases, it is imperative to state that the link between the two sides of the equation reflects the Balance of Payments of a country. The Balance of Payment is the record of all the financial transactions of a nation with the rest of the world. Balance of Payments ideally should always be zero to ensure that nations are not spending beyond their means or on the opposite side, not hoarding its fiscal resources that could lead to a regional or global financial crisis.
Spending beyond a country’s means could result in increasing its local or external debts which would counter-act or zero out its Balance of Payments. An unchecked increase in external and local loans could result in an economic collapse starting with its monetary system after a short duration spiral. The domino-effect would then ensue, affecting inflation for consumer items, interest rates for banks, closure of manufacturing plants dependent on imported raw materials that lead to the loss of jobs.

Hoarding, on the other hand, results in the shortage of the amount of money being circulated in the global or regional economy. Since the US dollar is considered as the de facto international currency, the absence of the dollar in international circulation could lead to the collapse of some economy due to the spiraling devaluation of its monetary system against the dollar. The absence of available money for institutional short term loans from international sources could prompt the government to look inward to finance its US dollar requirements. ...Download file to see next pagesRead More
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