Exam 3: The Balance of Payments

China is currently experiencing a surplus in its current account and its capital/financial accounts.Which of the following is NOT a contributing factor for this unusual situation?

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.

When the world went to a system of floating exchange rates,the Balance of Payments became a relic of a system of fixed exchange rates and is no longer watched by serious economic groups.

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.

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

Because current and financial/capital account balances use double-entry bookkeeping it is unusual to find serious discrepancies in the debits and credits.

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.

An excess of merchandise exports over merchandise imports results in a balance of trade deficit.

Dutch Disease is a term applied to a problem in the 1970 whereby the Netherlands were experiencing massive and sudden inflows of capital from abroad.What was the cause of this sudden influx of capital,and what types of potential problems did it have for the Dutch or could it have for any small single resource country?

Significant amounts of United States Treasury issues are purchased by foreign investors,therefore the U.S.must earn foreign currency to repay this debt.

Use the following terms for this question: C = consumption I = capital investment spending G = government spending X = exports of goods and services M = imports of goods and services BOP = balance of payments GDP = gross domestic product NPV = net present value INF = inflation R = real rate of return The static equation for the nations GDP is:

Capital controls may take a variety of forms EXCEPT:

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

For at least the last decade,the United States has consistently run a surplus in services trade income.

In general,as a country's income increases,so does the demand for imports.

Expenditures by U.S.tourists in foreign countries for foreign goods or services are factored into BOP calculations.

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

As of year-end 2010,the United States still held the world's largest foreign exchange reserve,but the total was rapidly being approached by China.

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

The transition to floating exchange rate regimes in the 1970s (described in Chapter 3)changed the focus from the total BOP to its various subaccount like the current and financial account balances.