Chapter 5

Question 1

What is the name of the accounts that record a country’s international transactions?

Answer 1

Balance of Payments accounts

Question 2

What are the three main components of the Balance of Payments accounts?

Answer 2

Current Account, Capital Account, and Financial Account

Question 3

What is the difference between a credit item and a debit item in the Balance of Payments accounts?

Answer 3

A credit item involves a flow of funds into the country, while a debit item involves a flow of funds out of the country.

Question 4

What are the three subcomponents of the Current Account?

Answer 4

Net exports of goods and services (NX), net income from abroad (NFP), and net unilateral transfers (NUT)

Question 5

What is the formula for calculating net exports of goods and services (NX)?

Answer 5

NX = exports - imports

Question 6

What are some examples of services that are included in net exports of goods and services (NX)?

Answer 6

Services include tourism, insurance, and education.

Question 7

What is the formula for calculating net income from abroad (NFP)?

Answer 7

NFP = net income receipts from abroad - income payments to residents of other countries

Question 8

What are some examples of income that are included in net income from abroad (NFP)?

Answer 8

Income includes workers income and investment income.

Question 9

What are some examples of transfers that are included in net unilateral transfers (NUT)?

Answer 9

Transfers include official foreign aid and remittances.

Question 10

What is the formula for calculating net unilateral transfers (NUT)?

Answer 10

NUT = transfers received - transfers flowing out of the country

Question 11

What is the difference between a small open economy and a large open economy?

Answer 11

A small open economy is one that takes the world interest rate as given, while a large open economy is one that can affect the world interest rate through its saving and investment decisions.

Question 12

What is the relationship between the current account and the financial account in the balance of payments accounts?

Answer 12

The current account and the financial account must add up to zero, meaning that any surplus or deficit in one account must be matched by an equal but opposite surplus or deficit in the other account.

Question 13

What is the difference between an open economy and a closed economy in terms of saving and investment?

Answer 13

In an open economy, saving and investment do not have to be equal, while in a closed economy, saving and investment must be equal.

Question 14

What does it mean when saving is greater than investment in an open economy?

Answer 14

It means that the economy will lend to the international market, or have a current account surplus.

Question 15

What does it mean when saving is less than investment in an open economy?

Answer 15

It means that the economy will borrow from the international market, or have a current account deficit.

Question 16

Financial Account involves

Answer 16

Purchase or sale of
assets

e.g (money, stocks, factories, government debt)

Question 17

Capital account involves

Answer 17

Special kind of assets

(debt forgiveness, copyrights and trademarks)

Question 18

What is the name of the account that records the purchase or sale of assets in the Balance of Payments accounts?

Answer 18

Financial Account

Question 19

What is the difference between a financial inflow and a financial outflow?

Answer 19

A financial inflow is when a foreign firm buys domestic assets, while a financial outflow is when a domestic firm buys foreign assets.

Question 20

What does it mean when a country has a financial account surplus?

Answer 20

It means that foreign inflows are greater than foreign outflows, or that the country is a net seller of assets.

Question 21

What does it mean when a country has a financial account deficit?

Answer 21

It means that foreign inflows are less than foreign outflows, or that the country is a net buyer of assets.

Question 22

What does it mean when a country increases its official reserve assets during a year?

Answer 22

It means that the country has a balance of payments surplus, or that it is lending more to the rest of the world than it is borrowing.

Question 23

What is the relationship between the net increase in a country’s official reserves and the balance of payments?

Answer 23

The net increase in a country’s official reserves is equal to the balance of payments.

Question 24

What are the official reserve assets that are used by central banks?

Answer 24

Foreign exchange reserves

Question 25

What does it mean when a country reduces its holding of official reserve assets during a year?

Answer 25

It means that the country has a balance of payments deficit, or that it is borrowing more from the rest of the world than it is lending.

Question 26

What is the relationship between the current account and the financial account in the balance of payments accounts?

Answer 26

The current account and the financial account must add up to zero, meaning that any surplus or deficit in one account must be matched by an equal but opposite surplus or deficit in the other account.

Question 27

What does a current account surplus imply for the financial account and the net foreign assets?

Answer 27

A current account surplus implies a financial account deficit and a net acquisition (accumulation) of foreign assets, or a net foreign lending.

Question 28

What does a current account deficit imply for the financial account and the net foreign assets?

Answer 28

A current account deficit implies a financial account surplus and a net sale of foreign assets, or a net foreign borrowing.

Question 29

Under what condition does a current account surplus or deficit equal to net exports?

Answer 29

A current account surplus or deficit equals to net exports when net income from abroad and net unilateral transfers are both zero.