Chapter 1 Balance of Payment
Exercises
1.Single-choice questions
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2.True/False questions
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3.Noun explanation
(1)Balance of payments
The balance of payments is the record of the economics and financial flows that take place over a specified time period between residents and non-residents of a given country.
(2)Credit
A credit item (+)is a flow for which the country is paid.
(3)Debit
A debit item (-)is a flow for which the country must pay.
(4)Current account
Records the values of goods and services sold and purchased abroad, plus net interest and other factor payments and net unilateral transfers and gifts.A current account surplus shows that a country has positive net foreign investment.
The trade balance
The trade balance comprises merchandise exports FOB minus imports FOB.
Non-financial services
Non-financial services include such things as freight, insurance, passenger services and travel.
Investment income
Investment income comprises income derived from the ownership of foreign financial assets.
Unrequited transfers
The final components of the current account are private unrequited transfers and official unrequited transfers.
(5)Capital account
Direct investment and portfolio investment
The difference between direct investment and portfolio investment revolves around whether or not the investor intends to take an active role in the management of the enterprise the assets of which are being acquired.
Other capital
(6)Counterpart items
They arise because of the double entry system in balance of payments accounting and refer to adjustments in reserves owing to monetization or demonetization of gold,allocation or cancellation of SDRs and revaluation of the various components of total reserves.
(7)Basic balance
This is the current account balance plus the net balance of long-term capital flows.It was argued that any significant change in the basic balance must be a sign of a fundamental change in the direction of the balance of payments.The more volatile elements such as short-term capital flows and changes in official reserves were regarded as below the line items.
(8)Official settlement balance
The official settlements balance focuses on the operations that the monetary authorities have to undertake to finance any imbalance in the current and capital accounts.
The official settlements concept of a surplus or deficit is not as relevant to countries that have floating exchange rates as it is to those with fixed exchange rates.
(9)Governments tend to interfere with markets in two fundamental ways.
a.Governments may restrict domestic economic activity to achieve a better overall balance on external accounts.We refer to this restriction as the unemployment effect.
b.Governments may place quotas or tariffs on merchandise imports to improve the overall balance of payments performance.We refer to this action as the controls effect.
(10)Process of adjustment
This adjustment is in response to the various economic forces that impact a country’s balance of payments.
Differences in inflation from country to country affect the competitive position of goods and services that are traded.
Differences in real economic growth between countries also impact their respective balance of payments.
Countries with high growth rates may exhibit high real interest rates in their respective capital markets.High real interest rates attract capital inflows.
Changes in foreign exchange rates also influence balance of payments transactions.A rise in the value of a nation’s currency reduces the competitiveness of that nation’s exports and also makes imports more attractively priced to residents.
(11)Official international reserve assets
Official international reserve assets are money-like assets that are held by governments and that are recognized by governments as fully acceptable for payments between them.The changes in domestic official reserve assets and in domestic official liquid liabilities to foreign officials.It is derived by dividing private transactions from official “accommodative” transactions in the balance of payments accounts.
(12)Official settlements balance
Also called the “official balance”, this is the sum of the current account balance plus the private financial account balance.An imbalance in the official balance must be paid for through official reserves transactions.
4.Questions and calculations
The current account balance:
$346-354+480-348+153+142 = $419;
The official settlement balance:
$346-354+480-348+153+142+252-352+154 = $473;
Change in official reserve assets (net):
= the official settlement balance = $473.
Increasing the holding of official reserve assets.