Exam 3: The Balance of Payments

The BOP must be in balance, but the current account need not be.

One of the motivations for capital controls is to insulate an economy from foreign political risks.

Imports have the potential to lower a country's inflation rate. In particular, imports of HIGHER-priced goods and services place a limit on what domestic competitors charge for comparable goods and services.

Use the following terms for this question: (X-M) = Current Account Balance (CI-CO) = Capital Account Balance (FI-FO) = Financial Account Balance (I-S) = Investment-Saving Balance FXB = Reserve Balance BOP = balance of payments GDP = gross domestic product C = consumption I = capital investment spending G = government spending The static equation for the BOP is:

A country experiencing a serious BOT ________ is more likely to ________ exports than otherwise.

Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of:

Under a fixed exchange rate system, the government bears the responsibility to ensure that the BOP is near zero. If the sum of the current and capital accounts do not approximate zero, the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves. If the sum of the first two accounts is LESS THAN ZERO, a ________ demand for the domestic currency exists in the world. To preserve the fixed exchange rate, the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.

The two major concerns about foreign direct investment are:

In general, there is consensus that ________ should be free, but there is no such consensus that ________ should be free.

China's current political plan includes reducing their foreign exchange reserve balance by allowing the yuan to float freely and by switching their goods balance from one of a net surplus to a net deficit.

The immediate impact of a devaluation of the domestic currency is to decrease the value of the spot exchange rate S$/fc.

The ________ includes all international economic transactions with income or payment flows occurring within the year.

The largest single component of the United States current account is:

Portfolio investment is capital invested in activities that are ________ rather than made for ________.

Consider the following: A foreign automobile company builds a manufacturing plant in Tennessee and European investors buy U.S. Treasury Bonds.

In the United States and most developed countries, the current account and the combined financial/capital accounts tend to be inversely related in that when one is positive, the other tends to be negative.

The measurement of all international economic transactions that take place between the residents of a country and foreign residents is called the balance of payments (BOP). List and explain three reasons why host-country BOP data is important to managers and investors.

Longer-term capital flows reflect short-term interest rate differentials and exchange rate expectations.

Changes in the BOP may predict the imposition or removal of foreign exchange controls.

Expenditures by U.S. students abroad and foreign students pursuing studies in the United States would be considered a services trade and part of the U.S. current account.