Balance of Payments

Question 1

What is the definition of the balance of payments?

Answer 1

The Balance of Payments is a summary statement in which, in principle, all the transactions of the residents of a nation with the residents of all other nations are recorded during a particular period of time, usually a calendar year.

Question 2

What is the main purpose of the balance of payments?

Answer 2

To inform the government of the international position of the nation and to help it in its formulation of monetary, fiscal, and trade policies.

Question 3

Why do governments consult the balance of payments of important trade partners?

Answer 3

To help in making Policy decisions

Question 4

What are some benefits of having the information contained in a nation’s balance of payments?

Answer 4

The information contained in a nation’s balance of payments is indispensable to banks, firms, and individuals directly or indirectly involved in international trade and finance

Question 5

WHat does an International transaction refer to

Answer 5

The exchange of a good, service, or asset (for which payments is usually required) between the residents of one nation and the residents of other nations.

Question 6

Are gifts included in a nation’s balance of payments?

Answer 6

Yes, although no payments are required

Question 7

who is a resident of a nation?

Answer 7

Diplomats, military personnel, tourists, and workers who temporarily migrate are residents of the nation in which they hold citizenship. Similarly, a corporation is the resident of the nation in which it is incorporated, but its foreign branches and subsidiaries are not

Question 8

What are the two types of international transactions?

Answer 8

International transactions are classified as credits or debits.

Question 9

What are Credit transactions?

Answer 9

Credit Transactions are those that involve the receipt of payments from foreigners.

Question 10

What are Debit transactions?

Answer 10

Debit Transactions are those that involve the making of payments to foreigners

Question 11

How are transactions entered in the nation’s balance of payments?

Answer 11

Credit Transactions are entered with a positive sign, and debit transactions are entered with a negative sign

Question 12

What are the transactions that are recorded as debit in the nation’s balance sheet?

Answer 12

The import of goods and services, unilateral transfers or gifts made to foreigners, and capital outflows involve payments to foreigners and are entered

Question 13

What are the two types of capital inflows?

Answer 13

Capital Inflow can take either of two forms: an increase in foreign assets in the nation or a reduction in the nation’s assets abroad.

Question 14

What is an example of a capital inflow that involves an increase in foreign assets in the nation?

Answer 14

When a U.K. resident purchases a U.S. stock, foreign assets in the United States increase. This is a capital inflow to the United States and is recorded as a credit in the U.S. balance of payments.

Question 15

What is an example of a capital inflow that involves a reduction in the nation’s assets abroad?

Answer 15

when a U.S. resident sells a foreign stock, U.S. assets abroad decrease. This is a capital inflow to the United States and is recorded as a credit in the U.S. balance of payments because it involves the receipt of a payment from foreigners.

Question 16

What are the two types of capital outflows and how are they recorded in the balance of payments?

Answer 16

Capital Outflows can take the form of either an increase in the nation’s assets abroad or a reduction in foreign assets in the nation because both involve a payment to foreigners

Question 17

What is an example of a capital outflow that involves an increase in the nation’s assets abroad?

Answer 17

The purchase of a U.K. treasury bill by a U.S. resident increases U.S. assets abroad and is a debit because it involves a payment to foreigners.

Question 18

What is an example of a capital outflow that involves a reduction in foreign assets in the nation?

Answer 18

The sale of its U.S. subsidiary by a German firm reduces foreign assets in the United States and is a debit because it involves a payment to foreigners

Question 19

What are the three types of transactions that are credits (+) in the balance of payments and why?

Answer 19

The export of goods and services, the receipt of unilateral transfers, and capital inflows are credits (+) because they all involve the receipt of payments from foreigners

Question 20

What are the three types of transactions that are debits (-) in the balance of payments and why?

Answer 20

The import of goods and services, unilateral transfers to foreigners, and capital outflows are debits (-) because they involve payments to foreigners.

Question 21

What is the name of the accounting procedure used to record a nation’s international transactions?

Answer 21

Double-entry bookkeeping

Question 22

How many times is each international transaction recorded in the balance of payments?

Answer 22

Twice, once as a credit and once as a debit of an equal amount

Question 23

What are the two sides of every transaction in the balance of payments?

Answer 23

We sell something and we receive payment for it; we buy something and we have to pay for it

Question 24

How is a goods export recorded as a credit and a debit in the balance of payments?

Answer 24

A goods export is recorded as a credit in the current account because it leads to the receipt of a payment from foreigners; the payment itself is recorded as a debit in the capital account because it represents a capital outflow from the nation

Question 25

What are the four main components of the balance of payments?

Answer 25

1) Current Account.
2) Capital Account.
3) Official Reserve Account.
4) Statistical discrepancy

Question 26

What are the three main components of the current account?

Answer 26

1. value of trade in merchandise(goods) and services
2. Investment incomes
3. Unilateral transfers

Question 27

What does the value of trade in merchandise and services include?

Answer 27

Included are travel and tourism, transportation costs and insurance premiums

Question 27

What does the value of trade in merchandise and services include?

Answer 27

Included are travel and tourism, transportation costs and insurance premiums

Question 28

Services refer to

Answer 28

Trade in services of factors of production, land, labor and capital.

Question 29

What is the difference between investment incomes and unilateral transfers?

Answer 29

Investments income includes interest and dividends receipts on national assets abroad (credit +) and interest and dividends payed on foreign assets inside the nation (debit -). While , unilateral transfers includes gifts, foreign aid, remittances of workers.

Question 29

What does the capital account measure?

Answer 29

The change in owned assets abroad and foreign owned assets.

Question 30

Why are financial reserve assets excluded from the capital account?

Answer 30

changes in reserves reflect government policy rather than market forces

Question 31

What are the six types of official reserve assets?

Answer 31

a) Monetary gold: gold transactions by the monetary authorities (central banks).
b) Foreign currency bank deposits owned by the monetary authorities.
c) Short term officially held foreign claims (treasury bills)
d) Domestic currency bank deposits owned by foreign monetary authorities.
e) Short term domestic claims owned by foreign monetary authorities.
f) International monetary fund resources.

Question 32

What is the main purpose of transactions in the official reserve account?

Answer 32

Transactions in the official reserve assets result from imbalances in the current and capital accounts. They are needed to balance international transactions. In other words, to finance imbalances in the current and capital accounts

Question 33

What is the cause of statistical discrepancy in the balance of payments?

Answer 33

due to errors in data collection and items measurements and estimation.

Question 34

What are the two main categories of a nation’s owned assets abroad and foreign-owned assets in the nation?

Answer 34

Direct investment and foreign securities

Question 35

What are some examples of owned assets abroad and foreign-owned assets in the nation?

Answer 35

Direct investment abroad, foreign securities, direct investment in the nation, nation’s treasury securities

This measures the change in the stock of all nonreserve financial assets

Question 36

What are the reserves for foreign governments?

Answer 36

• Domestic currency bank deposits owned by foreign monetary authorities.
• Short term domestic claims owned by foreign monetary authorities.

Question 37

What are the two types of transactions that are recorded in the current and capital accounts?

Answer 37

Autonomous transactions and unilateral transfers

Question 38

What is the term for transactions that involve changes in official reserve assets?

Answer 38

Accommodating transactions

Question 39

Why transactions in the current and capital accounts are called autonomous transactions?

Answer 39

Because they take place for business or profit motives (except for unilateral transfers) and independently of balance of payments considerations.

Question 40

Why transactions in official reserve assets are called accommodating transactions?

Answer 40

Because they result from and are needed to balance international transactions.

Question 41

What is the name of the account that records transactions in official reserve assets and what is another name for its balance?

Answer 41

Official reserve account and official settlements balance

Question 42

What does a deficit in the balance of payments indicate?

Answer 42

A deficit in the balance of payments occurs when total debits exceed total credits in the current and capital accounts.

Question 43

How is a deficit in the balance of payments measured?

Answer 43

A deficit in the balance of payments can be measured either by the excess of debits over credits in the current and capital accounts or by the excess of credits over debits in the official reserve account.

Question 44

What happens when there is a surplus in the balance of payments?

Answer 44

A surplus in the balance of payments occurs when total credits exceed total debits in the current and capital accounts.

Question 45

How is a surplus in the balance of payments settled?

Answer 45

A surplus in the balance of payments is settled by an equal debit balance (excess of debits over credits) in the official reserve account, which can take the form of increasing foreign reserves in the central bank, investment abroad, or lending to foreign governments.