Book2

Question 1

What is the formula for calculating the Terms of Trade (TOT)?

Answer 1

TOT = (Export Price Index / Import Price Index).

Question 2

If a country’s Export Price Index is 120 and its Import Price Index is 100, what is its TOT?

Answer 2

TOT = 120 / 100 = 1.2 (favourable TOT).

Question 3

How is a favourable Terms of Trade (TOT) determined?

Answer 3

A favourable TOT occurs when the export price index is higher than the import price index.

Question 4

Why might a country specializing in agricultural production face unfavourable terms of trade?

Answer 4

Agricultural products typically have lower prices compared to manufactured goods, leading to unfavourable terms of trade for agricultural exporters.

Question 5

Explain how the prices of exports and imports influence the Terms of Trade.

Answer 5

If export prices are high relative to import prices, the TOT is favourable; if import prices are higher, the TOT is unfavourable.

Question 6

What are the implications of a country having a consistently unfavourable Terms of Trade?

Answer 6

It may lead to economic challenges, such as reduced income from exports and difficulty in financing imports.

Question 7

Define the Balance of Visible Trade (BOVT).

Answer 7

BOVT is the difference between a country’s visible exports and visible imports.

Question 8

What are visible items in the context of international trade?

Answer 8

Visible items are physical goods traded between countries, such as machinery, oil, and agricultural products.

Question 9

How is a positive or favourable Balance of Visible Trade determined?

Answer 9

A positive BOVT occurs when the value of visible exports exceeds the value of visible imports.

Question 10

Provide examples of Nigeria’s visible exports and imports.

Answer 10

Visible exports: crude oil, cocoa, rubber. Visible imports: vehicles, machinery, and equipment.

Question 11

If a country’s visible exports are $500 million and visible imports are $400 million, what is its BOVT?

Answer 11

BOVT = $500 million - $400 million = $100 million (positive BOVT).

Question 12

What are the economic implications of a negative Balance of Visible Trade?

Answer 12

It indicates that a country is spending more on imports than it earns from exports, which can lead to trade deficits and economic strain.

Question 13

What is the Balance of Invisible Trade (BOIT)?

Answer 13

BOIT is the difference between a country’s invisible exports (services) and invisible imports.

Question 14

Give examples of invisible exports and imports.

Answer 14

Invisible exports: tourism, banking, insurance. Invisible imports: foreign services like shipping and entertainment.

Question 15

How does tourism contribute to a country’s invisible trade balance?

Answer 15

Tourism generates foreign exchange earnings, which are recorded as invisible exports, improving the BOIT.

Question 16

What are the consequences of a negative Balance of Invisible Trade?

Answer 16

It indicates that a country is spending more on foreign services than it earns, which can worsen the overall Balance of Payments.

Question 17

If a country’s invisible exports are $300 million and invisible imports are $350 million, what is its BOIT?

Answer 17

BOIT = $300 million - $350 million = -$50 million (negative BOIT).

Question 18

How can a country improve its Balance of Invisible Trade?

Answer 18

By promoting service sectors like tourism, banking, and insurance to increase invisible exports.

Question 19

What transactions are included in the Current Account?

Answer 19

The Current Account includes visible and invisible trade, unrequited receipts, and payments.

Question 20

How is the Current Account balance calculated?

Answer 20

Current Account Balance = (Exports of goods + Exports of services + Unrequited receipts) - (Imports of goods + Imports of services + Unrequited payments).

Question 21

If a country has $500 million in exports of goods, $200 million in exports of services, $100 million in unrequited receipts, $400 million in imports of goods, $150 million in imports of services, and $50 million in unrequited payments, what is its Current Account Balance?

Answer 21

Current Account Balance = ($500 + $200 + $100) - ($400 + $150 + $50) = $800 - $600 = $200 million (positive balance).

Question 22

What is the relationship between the Balance of Visible Trade and the Current Account?

Answer 22

The Balance of Visible Trade is a component of the Current Account, which also includes invisible trade and unrequited transfers.

Question 23

Explain the role of unrequited receipts in the Current Account.

Answer 23

Unrequited receipts are transfers like remittances or aid that do not require a return payment, contributing to the Current Account balance.

Question 24

How does a deficit in the Current Account affect a country’s economy?

Answer 24

It can lead to increased borrowing, depletion of foreign reserves, and potential currency devaluation.

Question 25

What types of transactions are recorded in the Capital Account?

Answer 25

The Capital Account records foreign investments, loans, grants, and other capital movements.

Question 26

What are the three main reasons for capital transfers between countries?

Answer 26

Investment abroad, loans between countries, and safety (e.g., moving funds to stable economies).

Question 27

How does foreign direct investment (FDI) impact the Capital Account?

Answer 27

FDI increases capital inflows, improving the Capital Account balance.

Question 28

What is the significance of a surplus in the Capital Account?

Answer 28

A surplus can help offset a deficit in the Current Account by providing additional foreign exchange.

Question 29

If a country receives $200 million in FDI and $100 million in portfolio investment, while investing $150 million abroad, what is its Capital Account Balance?

Answer 29

Capital Account Balance = ($200 + $100) - $150 = $150 million (surplus).

Question 30

How can a Capital Account surplus help offset a Current Account deficit?

Answer 30

The surplus provides foreign exchange that can be used to finance the deficit in the Current Account.

Question 31

What is the purpose of the Official Settlement Account?

Answer 31

It records changes in a country’s official international reserves, used to balance the Balance of Payments.

Question 32

How does an increase in Nigeria’s official international reserves affect the Official Settlement Account?

Answer 32

An increase in reserves results in a negative official settlement, as it represents an outflow of capital.

Question 33

What happens to the Official Settlement Account when a country’s reserves decrease?

Answer 33

A decrease in reserves results in a positive official settlement, as it represents an inflow of capital.

Question 34

How does Official Financing help balance the Balance of Payments?

Answer 34

It uses changes in reserves or borrowing to cover deficits or manage surpluses in the BOP.

Question 35

If a country’s reserves increase by $50 million, what is the Official Settlement?

Answer 35

Official Settlement = -$50 million (negative, as it represents an outflow).

Question 36

What are the implications of a negative Official Settlement?

Answer 36

It indicates an increase in reserves, which can be used to finance future deficits but may also reflect reduced liquidity in the economy.

Question 37

Define the Balance of Payments (BOP).

Answer 37

The BOP is a comprehensive record of all economic transactions between a country and the rest of the world over a specific period.

Question 38

Why must the Balance of Payments always balance in theory?

Answer 38

Because every transaction has a corresponding credit and debit entry, ensuring that total receipts equal total payments.

Question 39

What does it mean for a country to have a favourable Balance of Payments?

Answer 39

It means the country’s total receipts from exports and capital inflows exceed its total payments for imports and capital outflows.

Question 40

How is the overall Balance of Payments calculated?

Answer 40

Overall BOP = Current Account Balance + Capital Account Balance + Official Financing Balance.

Question 41

If a country has a Current Account Balance of $200 million, a Capital Account Balance of $150 million, and an Official Financing Balance of -$50 million, what is its overall BOP?

Answer 41

Overall BOP = $200 + $150 - $50 = $300 million (surplus).

Question 42

What are the implications of a Balance of Payments surplus?

Answer 42

It strengthens the local currency and increases foreign reserves but may indicate lower domestic consumption or investment.

Question 43

What are the main components of the Balance of Payments account?

Answer 43

The main components are the Current Account, Capital Account, and Official Financing Account.

Question 44

How does double-entry accounting apply to the Balance of Payments?

Answer 44

Every transaction is recorded as both a credit and a debit, ensuring that the BOP always balances.

Question 45

What is the difference between the Current Account and the Capital Account?

Answer 45

The Current Account records trade in goods and services, while the Capital Account records capital movements like investments and loans.

Question 46

How are statistical discrepancies accounted for in the Balance of Payments?

Answer 46

They are recorded as errors and omissions in the Capital Account to ensure the BOP balances.

Question 47

What is the role of the Accommodating Balance in BOP accounting?

Answer 47

It represents non-autonomous flows used by monetary authorities to balance the BOP, such as changes in reserves or borrowing.

Question 48

If a country has a Current Account deficit of $100 million and a Capital Account surplus of $120 million, what is its overall BOP?

Answer 48

Overall BOP = -$100 + $120 = $20 million (surplus).

Question 49

What are the economic benefits of a Balance of Payments surplus?

Answer 49

It increases foreign reserves, strengthens the currency, and improves international creditworthiness.

Question 50

Why might a Balance of Payments surplus not always be a positive indicator?

Answer 50

It may indicate lower domestic consumption or investment, and it can create trade imbalances with other countries.

Question 51

What are the potential problems associated with a large trade surplus?

Answer 51

It can lead to political pressure from other countries, demand-pull inflation, and reduced demand for exports.

Question 52

How does a Balance of Payments deficit affect a country’s exchange rate?

Answer 52

It can lead to a depreciation of the local currency, making imports more expensive and potentially causing inflation.

Question 53

What are the long-term consequences of a persistent Balance of Payments deficit?

Answer 53

It can lead to a decline in industrial base, increased foreign debt, and reduced economic growth.

Question 54

If a country has a BOP deficit of $200 million, what measures can it take to correct it?

Answer 54

It can devalue its currency, restrict imports, diversify its economy, or draw down on foreign reserves.

Question 55

How does inflation impact a country’s Balance of Payments?

Answer 55

High inflation makes exports more expensive and imports cheaper, leading to a trade deficit and capital flight.

Question 56

What role does investor confidence play in determining capital flows?

Answer 56

High confidence attracts foreign investment, while low confidence leads to capital flight, affecting the Capital Account.

Question 57

How do interest rates influence short-term capital movements in the Balance of Payments?

Answer 57

High interest rates attract foreign capital, while low rates may lead to capital outflows.

Question 58

What are some external factors that can cause Balance of Payments disequilibrium?

Answer 58

Natural disasters, wars, and global economic crises can disrupt trade and capital flows, leading to BOP disequilibrium.

Question 59

How can political instability in a country affect its Balance of Payments?

Answer 59

It can lead to capital flight, reduced foreign investment, and disruptions in trade, worsening the BOP.

Question 60

If a country experiences a sudden increase in inflation, how might its BOP be affected?

Answer 60

Exports may decrease due to higher prices, and imports may increase as foreign goods become relatively cheaper, leading to a BOP deficit.