Moffet Ch 4

Question 1

What are the three major sub-accounts of the Balance of Payments?

Answer 1

1. The current account
2. The capital account
3. The financial account

Question 2

Can the BoP be imbalanced?

Answer 2

NO! sub-accounts can, but the entire BoP is balanced per definition.

Question 3

What is correct about the BoP?

1. It is a balance sheet
2. It is a cash flow statement

Answer 3

2. It is a cash flow statement

Question 4

What two types of business transactions dominate the BoP?

Answer 4

1. Exchange of real assets

2. Exchange of financial assets

Question 5

Why does debits and credits in the BoP often not match?

Answer 5

In theory they should, but most often they don’t. The transactions are recorded independently of each other, and this leads to serious discrepancies.

Question 6

What four sub-categories are there to the Current Account?

Answer 6

1. Goods trade (X & M of goods)
2. Services Trade (X & M of services)
3. Income (primarily income from investments in previous periods and wages and salaries paid to non-resident workers)
4. Current transfers (one way transfers, such as aid)

Question 7

Describe the Capital Account

Answer 7

The Capital Account is made up of transfers of financial assets and the acquisition and disposal of nonproduced/nonfinancial assets.

It is introduced relatively recently by the IMF, and its magnitude is relatively minor.

Question 8

What three components does the Financial Account include?

Answer 8

1. Direct investment
2. Portfolio Investment
3. Other asset investment

Question 9

About direct investment in the BoP. How big a share of a company is to be held by foreign investors in order for it to be included in the financial account?

Answer 9

10% or more, and similarly when the home country’s business invest abroad.

Question 10

What is portfolio investment in the BoP?

Answer 10

This is the net balance of capital that flows in and out of the home country but does not reach the 10% ownership threshold of direct investment.

Question 11

What is other asset investment in the BoP?

Answer 11

Consist of various short-term and long-term trade credits, cross border loans, currency and bank deposits & and other payables and receivables related to cross border trade.

Question 12

Describe the J-curve

Answer 12

The J-curve traces a country’s trade balance following a depreciation of the country’s currency. Initially the deficit increases, but over time the effects starts working, and the trade balance improves.