How balance of payment is determined?
What is balance of payment?-A statement of a country’s trade and financial transaction with the rest of the world over a particular period of time, usually a year Show What are the components of balance of payment?-Current Account -Capital Account (LT term capital inflow) -Financial Account (inflow of hot money/ equity transaction) -The Balancing Item -The Overall Balance What is current account?-Monetary transfer for exports and imports of goods and services, income flows and net transfers in and out of the country. -It comprises of visible balance (BOT), invisible balance (services), income balance(remittance of profit and dividends), transfer balance (remittance) What is capital account?-All inflows and outflows of funds due to financial activities like acquisition and disposal of fixed assets, shares, government grants for overseas
project, etc What is financial account?-Records investment overseas by local residents and the inward flow of investment funds from foreign residents. International flows of investment funds can be short term or long term. -Short term capital flows is bank deposits (affected by interest rate) -Long term capital flows include the holdings of securities or bonds by local or foreign residents What is the balancing item?-The
balancing item is a statistical item to compensate for the errors and omissions made in recording the value of the country’s international transactions. What is the overall balance?-The sum of the current account balance, capital account balance, financial account balance and the balancing item What is the official financing account?-An accommodating account that shows how the monetary authorities have dealt with the net money flow in order to reflect that the balance of payments always balances. -It consists of Deposits and Withdrawals in IMF, Gold Reserve and Foreign Currency Reserves How changes in balance of payment equilibrium affect exchange rate?-Surplus in BOP – inflow of money will be greater than the outflow of money – need to transfer the money into the official financing account – increase in demand for local dollar and decrease in supply of local dollar – Appreciation -Impact of surplus BOP and appreciation will lead to negative effect like asset-based inflation and loss of export competitiveness as price of export will be higher due to appreciation but currency is stable and this will promote Singapore as a financial hub -Deficit in BOP – inflow of money will be lesser than outflow of money – need to borrow from the IMF or withdrawal from the Gold Reserve or Foreign Currency Reserve – decrease demand for local dollar and increase in supply of local dollar- Depreciation -Impact of deficit BOP and depreciation will contribute to imported inflation and raise the value of foreign debts but the price of exported goods will be lowered, raising export competitiveness. What is the J-curve effect?-The effect of depreciation of ER to correct for a BOP deficit. What is balance of payment deficit?Inflow of money will be lesser than outflow of money What is balance of payment surplus?Inflow of money will be greater than the outflow of money What are the factors affecting balance of payment disequilibrium?-Relatively High Domestic Inflation -Relatively High Economic Growth Rate -Overvalued Domestic Currency -Loss in Comparative Advantage (inefficiency of local industries/change in global -pattern of production) -Large increase in imports -Low domestic interest rates -Poor expectations of business profits -Undervalued domestic currency -High levels of domestic protection What are the impacts of balance of payment disequilibrium?-In the short-term, temporary and planned balance of payments disequilibrium does not pose a serious problem to an economy. BOP deficit may be necessary to promote economic growth, which will induce import of capital goods and resources – induce production and employment -In the long-term, persistent and unplanned disequilibrium is a serious problem and indicates a fundamental economic problem in the economy (may induce import of luxury goods –BOT deficit) Why should the government be concerned of balance of payment disequilibrium?-A long term and persistent BOP deficit will the exchange rate stability which will undermine the trading activities and flow of FDI -If the cause of the BOP deficit is due to BOT deficit which will indicate a fall in production of exported goods and service, the impact on unemployment will be a serious problem for the economy. -The growth of expenditure on goods and services may indicate a higher level of standard of living but it will also mean that local industries and losing out. Why should the government not be concerned of a balance of payment deficit?-A short and temporary BOP deficit will not prove serious problem as it will temporarily lower exchange rate to enhance competitiveness -If the BOP deficit is due to outflow of local FDI into foreign country, the growth of infrastructural business will be beneficial to the large economy in the long run. Furthermore, if the deficit is due to import of resources and capital equipment, it will be beneficial for the growth of the economy. What is undervaluation of currency?-Undervaluation refers to the condition where the exchange rate pegged by the
government is below the market-determined exchange rate. What is overvaluation of currency?-Overvaluation refers to the condition where the exchange rate pegged by the government is above the market-determined exchange rate. What is the Marshall-Lerner condition?Pedx + Pedm >1 What is invisible balance?-Services What is income balance?-Remittance of profit and
dividends What is visible balance? What is trade balance?-Balance of trade What are the factors affecting balance of trade?-Inflation rate – affect cost of production – affect Px and Pm -relative income level -taste and preference of the products -change in exchange rate -comparative advantage – affected by the change in cost of production -structural changes in the economy – economic development
What are the factors affecting financial account?-Interest rate- determined the return on saving -change in the exchange rate (encouraging speculative activities) What are the factors affecting capital account?-return on business -taxation policy -market demand- market sentiment -efficiency of the industries – return on investment What are the impacts of balance of payment deficit on a domestic economy?-Inflationary impact on the economy -Fall in national income and level of employment due to lower FDI and export demand -Decreases in foreign reserves -Affect the confidence of the investors What are the impacts of balance of payment deficit on an external economy?-Fall in exchange rate of a country’s currency -Deterioration in terms of trade (TOT) What are the impacts of a balance of payment surplus on domestic economy?-Increase in national income and level of employment due to higher level of FDI and surplus BOT -Increase in foreign reserves -Reduces the competitiveness of the export demand and in the attraction -Worsen the trading and capital flow condition of the trading partners. What are the impacts of balance of payment surplus on an external economy?-Rise in exchange rate of a country’s currency -Improvement in terms of trade (TOT) What is the scope of impact when there is balance of payment surplus?-Xd/Md/FDI/flow of fund – affect BOP equilibrium -AD (Real GDP)/Potential Growth – Sustainable Economic Growth -Production/Employment – low unemployment -COL/COP/SOL – Price stability -Distribution of Income and Wealth -Optimization of resource allocation What are the internal impacts of a balance of payment disequilibrium?-Inflationary impact on the economy -Fall in national income and level of employment due to lower FDI and export demand -Decreases in foreign reserves -Affect the confidence of the investors -Increase in national income and level of employment due to higher level of FDI and surplus BOT -Increase in foreign reserves -Reduces the competitiveness of the export demand and in the attraction -Worsen the trading and capital flow condition of the trading partners. What are the external impacts of a balance of payment disequilibrium?-Fall in exchange rate of a country’s currency -Deterioration in terms of trade (TOT) -Rise in exchange rate of a country’s currency -Improvement in terms of trade (TOT) How to calculate balance of payment?-The sum of the current account balance, capital account balance, financial account balance and the balancing item How to assess economic performance using balance of payment?-From the current account, the level of production of goods services can be noted as seen level of export of goods and services. We can also observe that the industries are mainly producing high valued production and there is the concentration of tertiary services. -The value of the income balance also reveals that the economy has a concentration of FDI and the increase in the flow of capital account (Long run) will also suggest that Singapore is competition enough to attract FDI. High depend of FDI and the presence of net export will substantiate that the economy is experiencing economic growth as the production capacity is increasing. -The import expenditure will indicate the level of the resource capacity the country can posses as Singapore relies greatly on import for production. It also indicates the level of standard of living as the rise in the import of services will mean that there is increase in consumption of services from abroad in the areas of tourism -High volume of deficit in the transfer balance reflects the high degree of dependency on foreign supply of labour. -For financial account, the flow of the transfer will affect the banking and finance industry which is one of critical industry in the economy and the indicator of the flow of hot money which will affect our short term exchange rate. The change in the exchange rate will affect the trading prices and of cost FDI which is affects the AD that influences production and national income. -The official financing reserve will reflect the level of stability of the external equilibrium as the amount and the distribution of reserve will affect the country’s ability to stabilize exchange rate. What is hot money?-It refers to money held by foreign investors that is liable to switch to another country’s currency within
a short notice, so as to obtain highest returns. What is capital flow?-It refers to the movement of capital in or out of a country due to certain factors like market and investor confidence. What is remittance?-It refers to the transfer of money from one country to another. What is speculation?-It refers to the buying or selling of a financial asset, so as to reap quick profit. What is balance of payment how it is determined?The balance of payment is the statement that files all the transactions between the entities, government anatomies, or individuals of one country to another for a given period of time. All the transaction details are mentioned in the statement, giving the authority a clear vision of the flow of funds.
What are the 3 components of the balance of payment?The balance of payments (BOP) is the method by which countries measure all of the international monetary transactions within a certain period. The BOP consists of three main accounts: the current account, the capital account, and the financial account.
What are the 5 components of balance of payment?Components of the balance of payment. Current account. ... . Financial account. ... . Capital account. ... . Decision-making. ... . Developing trade policies. ... . Establishing fiscal objectives. ... . Implementing growth strategies. ... . Analyzing deficits.. |