Balance of Payments

Question 1

Structure of BOP

Answer 1

Current Account: Trade in Goods and Services, Net Y Flows and Net Current Transfers
Financial Account: short-term capital flow/hot money, long/term capital or FDI and portfolio investment

Question 2

Consequences on Improvement of BOP (Good)

Answer 2

Expansionary impact of economy, higher growth and lower unemployment due to

• improve BOT
• FDI inflow (more employment opportunities)
• Hot-money inflow (more loanable funds for investors)
• Portfolio investment inflow (more foreigners buying government bonds means increase funds for govt spending)

Question 3

Consequences of Improvement of BOP (bad)

Answer 3

• If improvement of BOT due to low imports of C goods; lower material SOL
• May lead to demand-pull if there is tight capacity
• May lead to ballooning govt debt if due to increase in portfolio investment
• Over-reliance of FDI causes worsened Current Acc in future due to transfer of profits of MNCs to source country
• Too much inflow may lead to exchange rate appreciation and may worsen BOT (ML condition satisfied)

Question 4

Causes of Deterioration of BOP

Answer 4

Loss in CA

Question 5

BOP Definition

Answer 5

The Balance of Payments (BOP) for a country is a summary statement of the money value of all economic transactions between the residents of the country with the rest of the world during a specific period of time, usually a year