Balance of payments

Question 1

What are the economic transactions in BOP ?

Answer 1

• visible goods/items
• invisible goods/services
• unilateral transfers
• income from investment and work
• capital transfers

Question 2

Exports are recorded as ____ in the BOP and imports recorded as ______.

Answer 2

1) exports= credit ( inflow of foreign exchange )

2) imports = debit ( outflow of foreign exchange )

Question 3

Explain balance of trade.

Answer 3

BOT is the difference between export and import of visible items only.

BOT= exports - imports

Question 4

What are the two components of BOP ?

Answer 4

Current account and capital account

Question 5

What is current account in BOP?

Answer 5

current account in BOP includes all transactions between residents of the country and the rest of the world which DO NOT affect the asset or liability status of the country.

Question 6

What are the components of current account ?

Answer 6

• visible exports and imports
• invisible exports and imports
• unilateral transfers
• income from abroad

Question 7

Explain exports and imports of visible goods.

Answer 7

• exports are on the credit side
• imports are on the debit side
• balance of these items is called balance of trade

Question 8

Explain exports and imports of invisible goods.

Answer 8

• payments for these services is on the debit side
• receipts for these services is on the credit side
• balance of invisible trade

Question 9

Explain unilateral transfers

Answer 9

• payment of unilateral transfers to abroad is on the debit side
• receipt of unilateral transfers is on the credit side
• balance of unilateral transfers

Question 10

Explain income from investment.

Answer 10

• payments for above is on the debit side
• receipts for above is on the credit side
• balance of income in current account

Question 11

Explain how to balance a current account.

Answer 11

• receipts is credit as it leads to inflow of foreign exchange
• payments is debit as it leads to outflow of foreign exchange
• net value of debit and credit balance is balance on current account
• credit > debit = surplus/ inflow of FE
• credit < debit = deficit/ outflow of FE

Question 12

Explain capital account.

Answer 12

• transactions which do affect the asset/liability status of a country

Question 13

Explain the components under capital account

Answer 13

1) Borrowing and lending
- Private:
- affects private sector
- borrowing/receipts is on the credit side
- lending/payments is on the debit side
- Official transactions:
- affects public sector
- borrowing/receipts is on the credit side
- lending/payments is on the debit side
2) Investments:
- FDI:
- purchase of an asset in the rest of the world which gives full control
- purchasing is debit side, selling is credit side
- Portfolio investment:
- purchase of share which gives partial control
- purchase is debit, selling is credit
3) change in foreign exchange reserve ratio:
- addition to FE is debit
- withdrawal is credit