FINC 327 Chapter 2: BOP

Question 1

The balance of payments is

Answer 1

is a summary of transactions between domestic and foreign

residents for a specific country over a specified period of time.

Question 2

current account

Answer 2

represents a summary of the flow of funds
between one specified country and all other countries due to purchases of goods and services
or to the cash flows generated by income-producing financial assets

Question 3

capital account

Answer 3

sale of assets

between one specified country and all other countries over a specified period of time;

Question 4

3 components of current acct

Answer 4

(1) merchandise (goods)

and services, (2) factor income, and (3) transfers.

Question 5

balance of trade.

Answer 5

The difference between total exports and imports

Question 6

J.C. Penney purchases stereos produced in Indonesia that it will sell in its U.S. retail stores.

Answer 6

Debit

Question 7

Individuals in the United States purchase CDs over the Internet from a firm based in China.

Answer 7

Debit

Question 8

The Mexican government pays a U.S. consulting firm for consulting services provided by the firm.

Answer 8

Credit

Question 9

IBM headquarters in the United States purchases computer chips from Singapore that it uses in assembling computers.

Answer 9

Debit

Question 10

A university bookstore in Ireland purchases textbooks

produced by a U.S. publishing company.

Answer 10

Credit

Question 11

A U.S. investor receives a dividend payment from

a French firm in which she purchased stock.

Answer 11

Credit

Question 12

The U.S. Treasury sends an interest payment to a German insurance company that purchased U.S. Treasury bonds one year ago.

Answer 12

Debit

Question 13

A Mexican company that borrowed dollars from a bank based in the United States sends an interest payment to that bank.

Answer 13

Credit

Question 14

The United States provides aid to Costa Rica in response to a flood in Costa Rica.

Answer 14

Debit

Question 15

Switzerland provides a grant to U.S. scientists to work on cancer research.

Answer 15

Credit

Question 16

Factors that affect international trade flows

Answer 16

■ cost of labor,
■ inflation,
■ national income,
■ credit conditions,
■ government policies, and
■ exchange rates.

Question 17

If a country’s inflation rate increases relative to the countries with which it trades, then

Answer 17

its current account should decrease, other things being equal

Question 18

If a country’s income level (national income) increases by a higher percentage than those
of other countries, then

Answer 18

its current account should decrease, other things being equal.

Question 19

when Credit conditions tend to tighten, what happens to international trade?

Answer 19

decline in international trade flows

Question 20

tariff

Answer 20

government imposes a tax on imported goods, consumers must pay more to purchase foreign goods

Question 21

quota

Answer 21

a maximum limit that can be imported

Question 22

If a country’s currency begins to rise in value against

other currencies then its current account balance

Answer 22

should decrease, other things being equal.
As the currency strengthens, goods exported by that country will become more expensive
to the importing countries and so the demand for such goods will decrease

Question 23

Limitations of a Weak–Home Currency Solution

Answer 23

counterpricing from comps
there may be other weaker countries
stability of intra trade companies

Question 24

BOP Equation

Answer 24

=0=current asset balance + capital acct bal + NOR balance

Question 25

Direct Foreign Investment

Answer 25

a firm’s acquisition of a foreign company, its construction of a new manufacturing plant, or its expansion of an existing plant in a foreign country.

Question 26

How Exchange Rates May Correct a Balance-of-Trade Deficit

Answer 26

A balance-of-trade deficit suggests that the country is spending more funds on foreign products than it is receiving from exports to foreign countries. This exchange of its currency (to buy foreign goods) in greater volume than the foreign demand for its currency could place downward pressure on the value of that currency.

Once the country’s home currency’s value declines in response to these forces, the result should be more foreign demand for its products.

Question 27

International Monetary Fund (IMF)

Answer 27

(1) promote cooperation among countries on international monetary issues
(2) promote stability in exchange rates,
(3) provide temporary funds to member countries attempting to correct imbalances of international payments
(4) promote free mobility of capital funds across
countries
(5) promote free trade
It is clear from these objectives that the IMF’s goals encourage the increased internationalization of business.

Question 28

World Bank

Answer 28

Its primary objective is to make loans to countries in order to reduce poverty and enhance economic development.
Its main source of funds is the sale of bonds and other debt instruments to private investors and governments.

Question 29

World Trade Organization (WTO)

Answer 29

provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT.

Question 30

International Financial Corporation

Answer 30

established to promote private enterprise within countries. Composed of a number of member nations, the IFC works to promote economic development through the private rather than the government sector. It not only provides loans to corporations but also purchases stock, thereby becoming part owner in some cases in addition to a creditor.

Question 31

J- curve effect

Answer 31

The lag time between weakness in the dollar and increased non-U.S. demand for U.S. products has been estimated to be 18 months or even longer. The U.S. balance-of-trade deficit could deteriorate even
further in the short run when the dollar is weak because U.S. importers then need more dollars to pay for the imports they have contracted to purchase.

Question 32

total US exports and income receipts =

Answer 32

the amount of USD demanded.

Question 33

Total U.S imports and income payment

Answer 33

= the amount of USD supplied.

Question 34

So if the current account balance is negative, then

Answer 34

we can say that more was demanded then supplied

Question 35

Why Exchange Rates May Not Correct a Balance-of-Trade Deficit

Answer 35

because we are assuming with deficit no one will buy from you or need your currency but there may be financial inflow from buying securites