chapter 10

Question 1

Balance of Payments (BOP) definition

Answer 1

an accounting record of receipts & payments arising from all economic transactions between a country and the rest of the world over a period of time

Question 2

Credits (+) definition

Answer 2

receipts from international economic transactions (inflows of money from abroad) & increase in net assets abroad

• exports
• country’s investments overseas
• deposits of money overseas by residents
• loans made to other countries

Question 3

Debit (-) definition

Answer 3

payments for international economic transactions (outflows of money) & increase in liabilities

• imports
• foreign investments
• deposits of money in the country by non–residents
• loans made to the country

Question 4

Components of the BOP account

Answer 4

• current account
• capital & finance account

Question 5

Components of the Current Account

Answer 5

• the visible trade account
• the invisible trade account
• net income flows from abroad
• net current transfers

Question 6

Components of the Capital & Financial Account

Answer 6

• capital account
• financial account

Question 7

Causes of Balance of Payments (BOP) Disequilibrium

Answer 7

changes in :
- current account
- capital & fiancial account

Question 8

Factors affecting Current Account

Answer 8

real factors :
- changes in demand conditions & terms of trade
- relative incomes
- relative productivity
- physical destruction
- long-term changes in international trading patterns

monetary factors :
- relative inflation rates
- persistant overevaluation of the country’s currency

Question 9

Factors affecting Capital & Financial Account

Answer 9

• differences in expected rate of return on investments
• relative interest rates
• expected movements in the exchange rates

Question 10

Problems of Persistant BOT Deficit

Answer 10

internal effects :
- economic recession
- depletion of official reserves

external effects :
- devaluation of exchange rate & loss of confidence
- increased foreign debt burden

Question 11

Problems of Persistant BOT Surplus

Answer 11

• one country’s surplus is another country’s deficit
• the dutch disease effect
• demand-pull inflation
• changes in money supply

Question 12

Policies to reduce BOT deficit

Answer 12

expenditure-reducing policies :
- contractionary policies

expenditure-switching policies :
- anti-inflationary / deflationary policies
- depreciation/devaluation of currency
- use of import restrictions
- export promotion
- increase productivity