Chapter 11

Question 1

Balance of payments

Answer 1

A summary record of transactions between residents of a country and residents of other countries

Question 2

Data on international transactions place a crucial role in economic policymaking..

Answer 2

• central banks use information on international transactions in the formulation of monetary policy
• provide valuable information on activities of mncs –> gives insight into a country’s international competitiveness
• policymakers are better equipped to asses the performance of the overall global economy and compare economic performance across countries

Question 3

Main types of transactions

Answer 3

1- those involving production and sale of goods, services, and income transfers

2- those involving financial assets and liabilities

3- (small) those involving non produced non financial assets

Question 4

Current account of the balance of payments

Answer 4

The first category of international transactions-those involving production and sale of goods, services, income, and unilateral transfers

• Transactions in goods (visibles)
• Transactions in services (invisibles)
• tourism
• transport
• insurance
• communication
• software’s, apps

•Transactions in income (Primary income)
-income from industrial property ( brands, patents
royalties, intellectual property rights)
-income from work (salaries for working to a
foreign company.
-income from investment (interest on foreign
loans, dividends, renting buildings)

•Unilateral transfers (Secondary income)

Question 5

Capital/financial account of the balance of payments

Answer 5

The second and third category of international transactions

2- those involving financial assets and liabilities

3- (small) those involving non produced non financial assets

Financial account
•Direct investment: buying/opening a factory (or a %)
•Portfolio investment: Ex. stock, bonds, certificates of
deposits
•Other investment: debts instruments

Capital account
- Non financial assets: acquisition/sale of land,
mineral deposits (fixed assets).

Question 6

A credit entry in the US balance of payments accounts

Answer 6

When a transaction leads to a payment to a US resident, company or government by a foreign resident (+)

Question 7

Credit entries

Answer 7

Flow of money into the country (+)

Question 8

A debit entry in the US balance of payments accounts

Answer 8

When a transaction involves a payment to a foreign resident by a US resident, business or government (-)

Question 9

Debit entries

Answer 9

Flow of money out of the country (-)

Question 10

The balance of payments identity

Answer 10

The sum of all credit and debit entries =0

–> The sum of the balances of the current account and the capital/financial account = 0

Question 11

Transactions in income (current account)

Answer 11

Mainly comprise of returns for the use of capital. (interest from holdings or financial assets such as bonds, dividends and reinvested profits)

Question 12

Unilateral transfers

Answer 12

Essentially gifts or donations of goods and services.

These include government donations of goods and services to countries experiencing natural and(or man-made disasters

Non-quid pro quo transfers

Also include private transfers

Question 13

Non-quid pro quo transfers

Answer 13

The recipient of the transfer does not make or promise to make any payment for the goods or services received

Question 14

The capital/financial account

Answer 14

International transactions involving capital flows- sales and purchases of financial assets (shares of stocks, bonds, bills, and certificates of deposits)

Question 15

Official Reserve Assets and Other Official (non-reserve) Assets (cap/fin account)

Answer 15

Transactions involving governments or agencies of governments like central banks.

US reserve assets include monetary gold, special drawing rights (SDRs), the country’s reserve position at the IMF, and foreign currencies.

Question 16

SDR

Answer 16

Virtual currency used by the IMF and convertible to most major currencies

Question 17

If the Federal Reserve wants to reduce the value of the US dollar..

Answer 17

Sell US dollars in exchange for foreign currencies

Question 18

If the Federal Reserve wants to raise the value of the US dollar..

Answer 18

Purchase of US dollars using foreign currency reserves

Question 19

Non produced, non financial assets (capital/financial account)

Answer 19

• acquisition or disposal of right to tangible assets- right to mineral deposits/ offshore drilling rights
• sales and purchases of trademarks and copyrights
• insured losses and debt forgiveness

Question 20

Statistical discrepancy

Answer 20

A balancing item in the balance of payments- inserted to ensure the perfect balance between credits and debits

Question 21

Trade deficit

Answer 21

Negative trade balance (exports + imports)

Question 22

Trade surplus

Answer 22

Positive trade balance

Question 23

Balance on income

Answer 23

Difference between income receipts and income payments

Question 24

Net unilateral transfers

Answer 24

Difference between received and given donations

Question 25

Balance on current account

Answer 25

The sum of the balance on goods and services, the balance on income and the net unilateral transfers

• the sum of all credit and debit entries in the current account

Question 26

Balance of payments deficit

Answer 26

The sum of credit and debit entries in the current, capital/financial (excluding official transactions) accounts, and the statistical discrepancy is negative

Implies a net credit (+) balance on official transactions–> a decrease in US official reserves

Spend more abroad than earned from abroad

Question 27

Balance of payments surplus

Answer 27

Spend less abroad than earned from abroad

Net debit (-) balance on official transactions- Increase in US official reserves

Question 28

Balance of payments equilibriums

Answer 28

The sum of credit and debit entries in the current, capital/financial (excluding official transactions) accounts, and the statistical discrepancy = 0

Spent just as much as earned abroad