Book 9: BOP

Question 1

When is there
1. BOT surplus
2. BOT deficit ?

Answer 1

1. Surplus: X>M
2. Deficit: X<M

Question 2

When is BOT
1. Improving
2. Worsening

Answer 2

1. (X-M) rises
   - X rises
   - M falls
2. (X-M) falls
   - X falls
   - M rises

Question 3

1. What does appreciation of home currency mean ?
2. What does depreciation of home currency mean ?

Answer 3

1. 1SGD can buy more USD
   1 USD can buy less SGD
2. 1SGD can buy less USD
   1 USD can buy more SGD

Question 4

How BOT changes when exchange rate changes ?
(appreciation of home currency)

Answer 4

SG currency appreciate

SG’s exports become more expensive in foreign currency.
-foreign demand for SG exports decrease
-fall in SG X

Imports of foreign g&s become cheaper in SGD.
-SG quantity demand for foreign g&s increases
-MLC

Assume that Marshall-learners condition holds
- if demand for imports is price elastic, M rises
- if demand for imports is price inelastic, M falls
- assuming that demand for imports is price elastic due to MLC

Effect on BOT
- since X falls and M rises, (X-M) falls and BOT is worsening

Question 5

How BOT changes when exchange rate changes ?
(depreciation of home currency)

Answer 5

SGD depreciates

SG exports become cheaper in foreign currency
- foreign demand for SG g&s increases
- rise in SG X Imports

Imports of foreign g&s become more expensive in SGD
- SG quantity demanded for foreign g&S decreases

Assume Marshall-lerners condition holds
- if demand for imports is price elastic, M falls
- if demand for imports is price inelastic, M rise
- assume demand for imports is price elastic due to MLC

Effect on BOT
- X rises and M falls, (X-M) rises and BOT is improving

Question 6

How does BOT change when inflation rate
1. Higher than other countries
2. Lower than other countries

Answer 6

1. BOT worsens
2. BOT improves

Question 7

How does BOT change when SGD
1. Appreciates
2. Depreciates

Answer 7

1. BOT worsens
2. BOT improves