BoP

Question 1

What is BoP?

Answer 1

Balance of payments procures a systemic record of economic transactions with the outside economy for a one year period. Capital inflows are recorded positively and outflows are recorded with negative figures. BoP has 3 components, each component account can have deficit or surplus, but the overall Balance of payments must add up to zero suggesting the equilibrium, where the sources of fund equals the value of used funds.

Imbalances in BoP translate into its exchange rate when country is in flexible exchange rate regime. This is obviously essential for understanding the external value of the domestic currency.

In theory Capital&Financial account and Current account should balance out but often there is a discrepancy between the two, because all this numbers and informations are gathered by surveys and various other type of methods, therefore we expect small discrepancies

Question 2

Current account

Answer 2

it covers transactions which creates no future claims in either direction, involving simply an exchange here and now. essentially the current account is EXPORTS - IMPORTS
but there are several types of exports and imports hence there are 4 sections which all added tofether to give total current account. It creates a problem when Surplus or Deficits hit the level that is a 5% of GDP or more.

Goods - it covers all transactions between a country and the foreign countries involving purchase and sale of a tangible good for current purpose.
Trade Balance = Exports - Imports
the size of the export and import will indicate how open is the economy.

Services - this account covers trade in intangible goods, including tourist spedning, overseas earning of domestic banks, consulting, accounting, earnings on roylaties on books .ie For instance Ireland imports cleaning services but exports Financial services.

Income - earnings that domestic and foreign residents receive from past investments made abroad ie ( IPD - interests, profits, dividends)

Transfers - includes foreign aid, gift, grants, and donations. For instance Ireland pays a fee to IMF and EU, for being member of them

Current account figures are important indicators of country’s economic health in the short term and a pressure on its currency

Question 3

Capital account

Answer 3

This account is made up of transactions of fixed assets.
Essentially what this account consent with is any transactions to do with transfer of a fixed asset. it is basically a record of change in foreign owned domestic asset and domestic owned foreign assets

Δ foreign owned assets (derivatives) in domestic economy - this can be understood by private ownership
Δ foreign reserves (reserves owned by foreign) - this can be viewed as official, or government, CB owned
Δ assets owned abroad by domestic
Δ Domestic reserves (reserves owned by us abroad)

Question 4

Financial account

Answer 4

This account consent with any transaction in financial assets.

Direct investment - flows of direct investment capital, for example the ownership of the business in the country is sufficiently extensive to give foreign residents some measure of control (typical 10% or more holdings)

Portfolio Investment - transactions with non residents in financial securities ( less than 10% holding)

Other investment asset - all other financial transactions, ie currency, deposit, loan

Question 5

Effect of Interest rate on BoP

Answer 5

Overall level of interest rate compared to other countries interest rate does have an impact on BoP. Lower interest rate should stimulate outflow of capital seeking higher interest rate in other countries.

Question 6

Inflation or Price level effect on BoP

Answer 6

If inflation is too high Import will increase to seek lower inflation or less charged comparable goods from other countries.