Balance of payments

Question 1

Define balance of payments

Answer 1

• record of a country’s international transactions
• % residents and rest of the world
• over a period of time
• records flow of gds and svcs
• credit and debit

Question 2

Credit

Answer 2

• foreign exchange frm foreigners
• exports
• unilateral transfers frm foreigners
• capital inflows (FDI)

Question 3

Debit

Answer 3

• payments to foreigners
• imports
• unilateral transfers to foreigners
• capital outflows

Question 4

Structure of BOP (CFC)

Answer 4

• Current a/c
• Financial a/c
• Capital a/c

Question 5

Current a/c

Answer 5

• total value of exports and imports of currently produced gds and svcs
• incomes
• current transfers
  1. Visible a/c (Balance of trade in gds)
  2. Invisible a/c

Question 6

Visible a/c (Current a/c)

Answer 6

• records the total value of exports and imports
• merchandise gds
• Visible balance: net exports
• Surplus when total value of exports > imports

Question 7

Invisible a/c (Current a/c)

Answer 7

i. Balance of trade in svcs
ii. Incomes
iii. Current transfers

Question 8

Balance of trade in svcs (Invisible current a/c)

Answer 8

• total value of exports and imports of svcs
• ie. transportation, tourism, purchasing an airline ticket frm a foreign airline considered import of svc

Question 9

Incomes (Invisible current a/c)

Answer 9

• all inflows into a country of factor payments (wrip)

Question 10

Current transfers (Invisible current a/c)

Answer 10

• payments made to another country
• nothing received in return
• ie. SG gov put tgt an assistance package for China when COIVD was first detected

Question 11

Current a/c surplus

Answer 11

• total value of exports of gds and svcs, current transfers, incomes received > total value of imports of gds & svcs, current transfers, incomes paid out

Question 12

Financial a/c (D.R.O.P)

Answer 12

1. Direct investment
2. Reserve assets
3. Official borrowing
4. Portfolio investment

Question 13

Direct investment (Financial a/c)

Answer 13

• transactions that involve the creation of real physical assets
• ie. setting up Jap factory in Sg – FDI into sg
• inflow of funds in the capital and financial a/c – credit
• vice versa for debit (outflow of funds when sg invests in another country)

Question 14

Portfolio investment (Financial a/c)

Answer 14

• purchase or sale of bonds
• ie. if sg resident buys shares in an overseas company – outflow in the financial a/c of Sg’s BOP – debit item

Question 15

Reserve assets (Financial a/c)

Answer 15

• refers to foreign currency reserves that central bank can buy or sell
• to influence the value of the country’s currency

Question 16

Official borrowing (Financial a/c)

Answer 16

• refers to gov borrowing from abroad
• inflow of funds due to borrowing (foreign gov debt) appear as credit
• outflow of funds due to loaning – debit
• negative value – country is a net lender (outflow > inflow)

Question 17

Financial surplus/deficit

Answer 17

• Surplus: (total value of financial) inflow >outflow
• Deficit: outflow> inflow

Question 18

Interdependence btwn the a/c

Answer 18

current a/c + (capital a/c + financial a/c + errors and omissions) = 0

Question 19

Why the current a/c and financial a/c are interdependent

Answer 19

Current a/c deficit:
- M > X
- consuming at a pt outside the ppc curve
- must be balanced with financial a/c surplus
- source of funds to buy imports