Master Framework
Learn these mental models first. Every question is just one of these patterns in disguise.
Surplus in one → automatic deficit in the other. This eliminates half the wrong answers on any BOP question.
- ◆Current Account: Goods, services, income, transfers — what you BUY and SELL with other countries. Trade balance lives here.
- ◆Financial Account: Investments — stocks, bonds, real estate bought/sold across borders. Money FLOWING IN or OUT.
- ◆Trade Surplus: Exports > Imports → more money coming IN → current account surplus
- ◆Trade Deficit: Imports > Exports → more money going OUT → current account deficit
Current surplus → Financial deficit. If you export more than you import, foreigners have your goods — they pay with investments in your country (financial account inflow = deficit for them).
Import = money OUT = trade deficit contributor. Buying a computer from Germany → increases US trade deficit.
Buying a foreign bond = Financial Account, NOT Current Account. It's an investment, not a trade in goods/services.
High inflation in Country A → A's currency depreciates. Why? Expensive goods → foreigners buy less → less demand for A's currency → it falls.
Consumption, money supply, population alone = NOT growth drivers. This kills most wrong answers instantly.
- ◆PPC shifts RIGHT: The only graph signal for economic growth. More of everything is now producible.
- ◆Real per capita GDP: The ONLY correct measure of standard of living. "Nominal" and "CPI rising" are traps.
- ◆Capital stock grows when: Gross Investment > Depreciation (net investment is positive)
- ◆Potential GDP decreases when: Depreciation > Gross Investment — capital is wearing out faster than it's replaced
- ◆Infrastructure: Public capital goods — roads, bridges, highways. NOT education, not financial institutions.
- ◆Labor productivity increases from: More capital per worker, better technology, better education/training
"LEAST likely to promote growth" = find the one that doesn't build capital, skills, or technology. Consumption of nondurables, population growth alone, and transfer payments (pensions, unemployment) are your go-to eliminations.
Net investment goes up → capital per worker goes up → output per worker goes up. Both directions move together, always.
Natural rate of unemployment going DOWN doesn't grow potential GDP — it just means the economy is at a different structural point.
Per capita = divide by population. If population grows faster than GDP, per capita GDP FALLS even if total GDP rises. Retired people reduce the productive workforce.
- ✂️"Nominal GDP" answers: Almost always wrong when the question asks about standard of living, growth, or real output. Nominal includes inflation — not a real improvement.
- ✂️"Money supply / tax rates / price level": These affect short-run output, NOT long-run growth per capita. Eliminate when question asks about LONG-RUN or PER CAPITA.
- ✂️"Population growth": More people ≠ higher per capita income. Can actually dilute per capita GDP. Eliminate for per capita questions.
- ✂️"Consumption spending": Never drives long-run growth. You can't consume your way to growth. Eliminate for growth-promotion questions.
- ✂️"Tariffs on capital goods": Makes capital MORE expensive → LESS investment → kills growth. Eliminate when question says "promotes growth."
- ✂️BOP trap: "surplus in balance of payments": BOP always = 0 by definition. It can't have a surplus. Eliminate any option that says "surplus/deficit in balance of payments."