Balance of Payments

Question 1

what reflects supply and demand for a country?

Answer 1

balance of payments

Question 2

what is a gauge of a nation’s competitiveness and health?

Answer 2

balance of payments

Question 3

what is balance of payments?

Answer 3

measurement of all international economic transactions between the residents of a country and foreign residents

Question 4

BOP debits =

Answer 4

payment outflows (negative)

Question 5

BOP credits =

Answer 5

payment inflows (positive)

Question 6

what are the 3 main elements of the process of measuring economics?

Answer 6

1. identifying international econ. transactions
2. understanding how transactions create debits and credits
3. understanding bookkeeping procedures for BOP acct

Question 7

what are the two primary sub accounts in BOP?

Answer 7

current and capital/financial

Question 8

what are the two other accounts in BOP?

Answer 8

official reserves and net errors/omissions

Question 9

describe the current account

Answer 9

• goods and services export/import
• current income –> investments, wages, salaries
• current transfers –> financial settlements associated with change (unilateral transfers)

Question 10

describe the capital and financial account

Answer 10

• capital = transfer of fixed assets and acquisitions/disposal of non-produced/non-financial assets
• financial = uses maturity and degree of control over assets to classify them

1. direct investment
2. portfolio investment
3. other investment

Question 11

what is captial control?

Answer 11

any restriction that limits or alters the rate or direction of capital movement into or out of a country

Question 12

what did the Bretton Woods Agreement promote?

Answer 12

free movement of capital for current account transactions

Question 13

what is capital flight?

Answer 13

-Characterized as rapid outflow of capital in fear of domestic political and economic conditions and policies
– Many heavily indebted countries have suffered capital flight, compounding their debt service problems
– Capital can be moved via international transfers, with physical currency, collectables or precious metals, money laundering or false invoicing of international trade transactions

Question 14

what is the primary source of similar statistics for BOP and econ performance worldwide?

Answer 14

The primary source of similar statistics for balance of payments and economic performance worldwide is
the International Monetary Fund.

Question 15

describe three specific signals that a country’s BOP data can provide

Answer 15

• BOP is an important indicator of pressure on a country’s foreign exchange rate and thus on the potential for a firm trading with or investing in that country to experience foreign exchange gains or losses. Changes in the BOP may predict the imposition or removal of foreign exchange controls.
  -may signal the imposition or removal of controls over payment of dividends and interest, license fees, royalty fees, or other cash disbursements to foreign firms or
  investors.
  -helps to forecast a country’s market potential, especially in the short run. A country experiencing a serious trade deficit is not likely to expand imports as it would if running a surplus. It may, however, welcome investments that increase its exports.

Question 16

what are the two main types of econ activity measured by a country’s BOP?

Answer 16

Current transactions having cash flows completed within one year, such as for the import or
export of goods and services.
 Capital and financial transactions, in which investors acquire ownership of a foreign asset, such
as a company, or a portfolio investment, such as bonds or shares of common stock.

Question 17

why does the BOP always balance?

Answer 17

The balance of payments is composed of three primary subaccounts: the current account, the financial
account, and the capital account. In addition, the official reserves account tracks government currency
transactions, and a fifth statistical subaccount, the net errors and omissions account, is produced to
preserve the balance in the BOP.

Question 18

why is the BOP often misunderstood?

Answer 18

The BOP is often misunderstood because many people infer from its name that it is a balance sheet,
whereas in fact it is a cash flow statement. By recording all international transactions over a period of
time, such as a year, the BOP tracks the continuing flows of purchases and payments between a country
and all other countries. It does not add up the value of all assets and liabilities of a country on a specific
date, like a balance sheet does for an individual firm.