International Finance Revision
Pack 2015
PRECIOUS PISAI
,The balance of payments(10/11/2009)
What is the balance of payments explain briefly (7 )/Explain the main accounts and subdivisions of the balance of
payments
The BOP is an accounting summary of various transactions that have taken place between a country and its trading
partners over a year.
The balance of payments is different from a national balance sheet. A national balance sheet is a statement of a
country’s assets and liabilities.
Such transactions are normally aggregated according to the type ofexchanges that have occurred – for example,
whether the transaction represents a trade ingoods, services or an exchange of financial assets or claims.
For example the South African Balance of payments consist of the following :
- The Current Account
-The Financial Account
-Unrecorded transactions
-The official reserves
Explain the main accounts and subdivisions of the balance of payments (15) or Discuss South Africa Balance of
payments .Name and discuss all items /Discuss current account of the South African balance of payments.
The Current Account
Subdivided into, trade account, net service receipts, net income receipts and current transfers.
Trade account-trade in physical goods. Trade balance not shown explicitly. Is calculated by subtracting
merchandise imports from merchandise exports plus net gold exports. (X+NX- I)
Large deficit on SA’s current account due to large merchandise imports. This means that SA borrows in
order to spend. (credit)
Service items – are transport of goods and passengers between countries
Income items are interest, dividends and foreign branch profits.
Current transfers – foreign payments and receipts of government social security payments and taxes, private
transfers of income (gifts, donations).
The Financial Account
Records exchanges of international asset
Subdivided into: direct investment, portfolio investment and other investment
Direct investment foreign investment in South Africa and investments abroad by South Africans.
Portfolio investment is the purchase and sale of financial instruments such as bonds, treasury bills and equities.
1
, Other investment includes all financial transactions not part of direct or portfolio investment. Main item is trade
credit.
Direct investment is considered more desirable than portfolio investment because it shows stronger commitment to invest.
It is more stable and has lasting positive effects on the domestic economy. Portfolio investment on the other hand is
characterised by speculative “hot money” flows which may prove disruptive and difficult for monetary authorities to
control.Direct investment may also bring with it much needed scarce skills and technology.
Unrecorded transactions
Arises from the use of a double entry accounting system to reconcile the balance of payments.
Serves as a residual that ensures that the balance of payment accounts always balance.
The official reserves
Records changes in the official gold and foreign exchange reserves. Changes in gold and foreign exchange reserves are
also referred to as the below the line or 'accommodating' foreign exchange flows.
Transactions not related to changes in official reserves are called autonomous or above the line flows.
Any imbalance in these flows is accommodated by the required change in official reserves.
The balance of payment always balances by definition and therefore does not present any economic problems for the
country concerned. True or false
This statement is true.
The BOP always balances but it does not mean there can never be any problems. The economic significance of
changes in the balance of payments must be clearly distinguished from the balance of payments as an accounting
statement.
Gold and foreign exchange reserves are not inexhaustible.
Autonomous flows can be accommodated temporarily by below the line flows or foreign credit. Long before the
reserves are exhausted, monetary and fiscal policy will be necessary to prevent full blown balance of payments crises.
The right measures will depend on whether the country concerned has a fixed or floating exchange system.
Imbalances above the line may be significant even if they don't require any change in official reserves . E.g. foreign
exchange outflows corresponding to a current account deficit may be more or less balanced by inflows corresponding
to a financial account surplus, that is, non-residents may be willing to finance the deficits.
However such borrowings must be repaid with interest. This borrowing from foreign lender cannot go on forever.
Lenders may no longer be willing to finance further deficits. This will require tough monetary and other policies.
Large current account surpluses are not without their own problems. Under flexible exchange rate system large
current account surpluses may lead to a sharp appreciation of the currency thereby reducing foreign demand for
exports and increasing domestic demand for imports in the short run. This may lead to reduced aggregate demand,
production and employment in the short run.
2
, A current account deficit is not necessarily bad and a surplus good. A current account deficit implies that a country is
consuming more than it is producing. Imports add to consumer welfare. Exports represent a sacrifice in the
production of goods and services that are not available for domestic consumption.
Changes in the foreign reserves reflect changes in the domestic money supply. A decrease in the reserves means that
people are exchanging domestic currency for foreign currency and therefore a decrease in the domestic money
supply.
Conversely an increase in the domestic supply implies that people are exchanging foreign currency into domestic
currency and thus increasing the domestic money supply.
Explain the difference between autonomous and accommodating foreign exchange flows and their significance
with regards with balance of payment
Autonomous foreign exchange reserves Accommodating foreign exchange flows
Above the line below the line
Transactions not related to changes in official reserves Transactions related to changes in official reserves
Autonomous transactions arise from the fundamental Accommodating transactions, which are not undertaken for
differences between countries in prices, incomes, interest their own sake, but rather have their source in other
rates, tastes (autonomous) transactions elsewhere in the balance of
payments.
Accommodating transactions reflect increases or decreases Accommodating transactions are the residual money
of the net foreign liquidity of a country. They are, flows (including flows of official reserves) that occur to fill
therefore, the best measure of surplus or deficit in the any gaps left by autonomous transactions.
balance of payments.
Discuss the current account of the South African balance of payments
The Current Account
Subdivided into, trade account, net service receipts, net income receipts and current transfers.
Trade account-trade in physical goods. Trade balance not shown explicitly. Is calculated by subtracting
merchandise imports from merchandise exports plus net gold exports. (X+NX- I)
Large deficit on SA’s current account due to large merchandise imports. This means that SA borrows in
order to spend. (credit)
Service items – are transport of goods and passengers between countries
Income items are interest, dividends and foreign branch profits.
3
Pack 2015
PRECIOUS PISAI
,The balance of payments(10/11/2009)
What is the balance of payments explain briefly (7 )/Explain the main accounts and subdivisions of the balance of
payments
The BOP is an accounting summary of various transactions that have taken place between a country and its trading
partners over a year.
The balance of payments is different from a national balance sheet. A national balance sheet is a statement of a
country’s assets and liabilities.
Such transactions are normally aggregated according to the type ofexchanges that have occurred – for example,
whether the transaction represents a trade ingoods, services or an exchange of financial assets or claims.
For example the South African Balance of payments consist of the following :
- The Current Account
-The Financial Account
-Unrecorded transactions
-The official reserves
Explain the main accounts and subdivisions of the balance of payments (15) or Discuss South Africa Balance of
payments .Name and discuss all items /Discuss current account of the South African balance of payments.
The Current Account
Subdivided into, trade account, net service receipts, net income receipts and current transfers.
Trade account-trade in physical goods. Trade balance not shown explicitly. Is calculated by subtracting
merchandise imports from merchandise exports plus net gold exports. (X+NX- I)
Large deficit on SA’s current account due to large merchandise imports. This means that SA borrows in
order to spend. (credit)
Service items – are transport of goods and passengers between countries
Income items are interest, dividends and foreign branch profits.
Current transfers – foreign payments and receipts of government social security payments and taxes, private
transfers of income (gifts, donations).
The Financial Account
Records exchanges of international asset
Subdivided into: direct investment, portfolio investment and other investment
Direct investment foreign investment in South Africa and investments abroad by South Africans.
Portfolio investment is the purchase and sale of financial instruments such as bonds, treasury bills and equities.
1
, Other investment includes all financial transactions not part of direct or portfolio investment. Main item is trade
credit.
Direct investment is considered more desirable than portfolio investment because it shows stronger commitment to invest.
It is more stable and has lasting positive effects on the domestic economy. Portfolio investment on the other hand is
characterised by speculative “hot money” flows which may prove disruptive and difficult for monetary authorities to
control.Direct investment may also bring with it much needed scarce skills and technology.
Unrecorded transactions
Arises from the use of a double entry accounting system to reconcile the balance of payments.
Serves as a residual that ensures that the balance of payment accounts always balance.
The official reserves
Records changes in the official gold and foreign exchange reserves. Changes in gold and foreign exchange reserves are
also referred to as the below the line or 'accommodating' foreign exchange flows.
Transactions not related to changes in official reserves are called autonomous or above the line flows.
Any imbalance in these flows is accommodated by the required change in official reserves.
The balance of payment always balances by definition and therefore does not present any economic problems for the
country concerned. True or false
This statement is true.
The BOP always balances but it does not mean there can never be any problems. The economic significance of
changes in the balance of payments must be clearly distinguished from the balance of payments as an accounting
statement.
Gold and foreign exchange reserves are not inexhaustible.
Autonomous flows can be accommodated temporarily by below the line flows or foreign credit. Long before the
reserves are exhausted, monetary and fiscal policy will be necessary to prevent full blown balance of payments crises.
The right measures will depend on whether the country concerned has a fixed or floating exchange system.
Imbalances above the line may be significant even if they don't require any change in official reserves . E.g. foreign
exchange outflows corresponding to a current account deficit may be more or less balanced by inflows corresponding
to a financial account surplus, that is, non-residents may be willing to finance the deficits.
However such borrowings must be repaid with interest. This borrowing from foreign lender cannot go on forever.
Lenders may no longer be willing to finance further deficits. This will require tough monetary and other policies.
Large current account surpluses are not without their own problems. Under flexible exchange rate system large
current account surpluses may lead to a sharp appreciation of the currency thereby reducing foreign demand for
exports and increasing domestic demand for imports in the short run. This may lead to reduced aggregate demand,
production and employment in the short run.
2
, A current account deficit is not necessarily bad and a surplus good. A current account deficit implies that a country is
consuming more than it is producing. Imports add to consumer welfare. Exports represent a sacrifice in the
production of goods and services that are not available for domestic consumption.
Changes in the foreign reserves reflect changes in the domestic money supply. A decrease in the reserves means that
people are exchanging domestic currency for foreign currency and therefore a decrease in the domestic money
supply.
Conversely an increase in the domestic supply implies that people are exchanging foreign currency into domestic
currency and thus increasing the domestic money supply.
Explain the difference between autonomous and accommodating foreign exchange flows and their significance
with regards with balance of payment
Autonomous foreign exchange reserves Accommodating foreign exchange flows
Above the line below the line
Transactions not related to changes in official reserves Transactions related to changes in official reserves
Autonomous transactions arise from the fundamental Accommodating transactions, which are not undertaken for
differences between countries in prices, incomes, interest their own sake, but rather have their source in other
rates, tastes (autonomous) transactions elsewhere in the balance of
payments.
Accommodating transactions reflect increases or decreases Accommodating transactions are the residual money
of the net foreign liquidity of a country. They are, flows (including flows of official reserves) that occur to fill
therefore, the best measure of surplus or deficit in the any gaps left by autonomous transactions.
balance of payments.
Discuss the current account of the South African balance of payments
The Current Account
Subdivided into, trade account, net service receipts, net income receipts and current transfers.
Trade account-trade in physical goods. Trade balance not shown explicitly. Is calculated by subtracting
merchandise imports from merchandise exports plus net gold exports. (X+NX- I)
Large deficit on SA’s current account due to large merchandise imports. This means that SA borrows in
order to spend. (credit)
Service items – are transport of goods and passengers between countries
Income items are interest, dividends and foreign branch profits.
3
