Balance of Payments

Question 1

What are the government objectives on the BoP

Answer 1

High economic growth
Stable economic growth
Low unemployment
Low inflation
Avoid BoP deficits 
Avoid excessive FX fluctuations 
Avoid financially distressed sector of the economy
A stable financial system

Question 2

Define balance of payments account

Answer 2

A statistical statement that summarises for a specific time period, the economic transactions of the residents of an economy with the rest of the world
The balance of payments shows the country’s payments to or deposits in other countries (debits) and its receipts or deposit from other countries (credits)

Question 3

Define open economy

Answer 3

An economy that trades with another country other than itself - Ireland is a small open economy - Taxes and tariffs make the economy less open

Question 4

What are the three components of the Balance of payments

Answer 4

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

Question 5

What is the current account

Answer 5

Record of imports and exports of goods and services plus incomes/transfers of money to/from abroad - direct money coming in and out of the economy

Question 6

What is the capital account

Answer 6

The record of transfers of capital to/from abroad

Question 7

What is the financial account

Answer 7

The record of the flows of money into/out of the country for investment or as deposits in banks - money for investment purposes

Question 8

Explain the four main components of the current account

Answer 8

Merchandise - Import and export of physical goods (Agri product, pharmaceuticals)
Services - Import and export of services
Primary Income - Compensation of employees and investment income
Secondary Income - Unrequited receipts (things you haven’t earned in a traditional sense) and payments (not expecting to receive payment unless an event occurs) (ex: Third world aid programmes)

Question 9

Explain the main components of the capital account

Answer 9

Capital transfer - Receivables under the EU regional development fund
Acquisitions/disposals - Non-produced, non-financial assets that are bought and sold (eg: sale of leases and licenses)

Question 10

Name the four main sections in the financial account

Answer 10

Direct investment
Portfolio investment
Reserve assets
Other investment

Question 11

Explain direct investment

Answer 11

Long term. significant and lasting interest in a business ex: foreign direct investment would be the main one. Foreign company investing money into an associated Irish company

Question 12

Explain portfolio investment

Answer 12

acquisition and disposal of equity and debt securities that can be bought or sold on the Irish exchange

Question 13

Explain reserve assets

Answer 13

Qualifying assets that are under the effective control of the national monetary authority (ie. central bank of Ireland)

Question 14

What is meant by net errors and omission

Answer 14

Balance of payments needs to balance so this is a catch-all and balancer for all of the other three accounts.
Net errors and omissions = -(Balance on current +balance on capital-balance of financial)