balance of payment

Question 1

definition of BOP

Answer 1

a record (usually for a year) of all external transactions between the residents of the country & the residents of all other countries

Question 2

role of BOP

Answer 2

to show all payments received from other countries (inflow of money/domestic currency) called credits & all payments made to other countries (outflow of money/domestic currency) called debits

Question 3

impact of BOP on exchange rate

Answer 3

all credits (inflow of money into the country) –> increased demand for the country’s currency, while all debits (outflow of money from the country) –> increased supply of the country’s currency

Question 4

structure of BOP current account balance of trade

Answer 4

1. trade of goods –> involving tangible goods, exports (inflows of money, credits +), imports (outflow of money, debits -), if M > X trade deficit & debits > credits hence net trade in goods is negative
2. trade of services –> involving tangible services such as insurance, tourism, finances, transportation & consulting, exports credits & imports debits, if X > M trade surplus & credits > debits hence net trade in services in positive