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SEPTEMBER 2013

PART A (QUESTION 3) Discuss four (4) major components of the Balance of Payment (BOP) (10m) There are 4 major accounts: 1. 2. Current Account Capital Account

3.
4.

Official Reserves Account


Errors and Omissions Account

MGT 361 (balance of payment)

1. CURRENT ACCOUNT
- Records 4 types of transaction: i. Exports and imports of goods . For example cotton, rice. if import > export (deficit) If export > import (surplus) ii. Exports and imports of services. For example banking services, health services iii. Investment income Government sell bond to foreigners to get money iv. Gifts Expatriate send their income to their home country (private unilateral transfers) Gifts between residents of one country and another country (public unilateral transfers)
MGT 361 (balance of payment)

2. CAPITAL ACCOUNT
Records purchases and sales of assets between residents of one country and other countries Can be divided into 2 (Foreign Direct Investment and Foreign Portfolio Investment)
Maturity Motivation Typical Investment

Portfolio 1 year/ less (short-term)

Investment income/ Facilitation of int. commerce


Investment income Active control of organization
MGT 361 (balance of payment)

Checking account balances Bank loans Time deposits


Govt. notes and bonds Corporate stocks and bonds Foreign factories/ subsidiaries

Portfolio (long-term) FDI

> 1 year

Indeterminate

Debit (Outflow) Portfolio (short-term) Receiving a payment from a foreigner

Credit (Inflow) Making a payment to a foreigner

Portfolio (long-term)

Buying a long-term foreign asset (not for purpose of control)

Selling a domestic long-term asset to a foreigner (not for purpose of control) Selling a domestic asset to a foreigner for purpose of control

FDI

Buying a foreign asset for a purpose of control

MGT 361 (balance of payment)

3. OFFICIAL RESERVES ACCOUNT


- Records the level of official reserves held by a national government. - This account records holding official reserves held by a national government - Example of reserves are gold and basket of currency. - For emergency use.

MGT 361 (balance of payment)

4. ERRORS AND OMISSIONS


Purpose of this account is to balance the account

It is because some of trading activities are not recorded in the BOP


Any business must be recorded in the BOP Example: smuggling (cigarettes). Government normally impose tax on cigarettes Politically stable countries (US) often destination of flight capital, money sent abroad by foreign residents seeking a safe haven for their assets (to avoid any official recognition of their transactions, making it difficult for government BOP statisticians to record such transactions.

MGT 361 (balance of payment)

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