balance of payments

Question 1

Formulae for BOP

Answer 1

capital account + financial account + current account=0
Therefore:
-Current account = captial account + financial account + net errors and omissions

Question 2

What is included in the current account?

Answer 2

Net goods
Net exports
Net income
Net current transfers ( remittances, dowries, inheritance)

Question 3

capital account

Answer 3

capital transfers
transactions in-produced, non-financial assets

Question 4

Financial account

Answer 4

Foreign Direct Investment
portfolio investment
Reserve assets
Official borrowing

Question 5

Foreign direct investments

Answer 5

Multinational company - a company with manufacturing plants in different countries. MNCs provide direct foreign investment to different nations. They can be done by either setting up a manufacturing plant in a foreign country or merging / acquiring a domestic business in a foreign country. It might also be in the form of a partnership with a domestic business.

FDI - an investment in the form of a controlling ownership in a business in one country by an entity based in another country.

Question 6

Why Are MNVs attracted to investing in Africa

Answer 6

Over a 10 year period GDP has tripled, from a low base, but this suggests the potential for growth. In resource rich nations much of the investment is focused on resource exploitation while more developed markets in South Africa for instance, the large domestic market has attracted firms such as Walmart and Burger King.

Trading blocs such as the east African bloc has been of particular interest to MNCs.

Question 6

Portfolio investments defintion

Answer 6

Portfolio investment is the purchase of shares and bonds. Direct investment includes investment in physical capital usually undertaken by multinational corporations. Current account balance: equal to the sum of the capital account and financial account balances.

Question 7

Reserve assets definition

Answer 7

Reserve assets are one of the four functional types of investment distinguished in the balance of payments. Reserve assets consist of financial instruments available to the central authorities for financing or absorbing an imbalance of payments or for regulating the size of such imbalances.

Question 8

Official borrowing

Answer 8

Government borrowing
Governments borrow from foreign banks and financial institution or IMF

Question 9

How to manipulate current account balance

Answer 9

To improve a deficit in the current account balance government can implement:
Expenditure switching policies
- raising the relative price of imports
- reducing relative price of exports
To depreciate currency
Expenditure reducing policy
Lowering disposable income; limiting AD and import expenditure - usually monetary and fiscal.
Supply-side policy; very long
- Investment in education and healthcare, infrastructure

Question 10

Marshall-Lerner Condition

Answer 10

Rule:
PED of exports + PED of imports must be greater than 1 to better the current account deficit, using the 3 policies. A value less than 1 will worsen the current account deficit.