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International Finance, Chapter 10 Carbaugh, Balance of Payment, Exercises of Payment Systems

Universitas Brawijaya (UB)Payment Systems
Prof. Farah Wulandari

Definition, double entry system, example of accounting BOP, BOP structure, types of transaction in each side, current account, capital and financial account, current account deficit, reserve currency, special drawing rights

Typology: Exercises

2022/2023

Available from 03/05/2023

annisya-zahro
annisya-zahro 🇮🇩

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Name : Annisya Zahro Firdausa
ID : 215020407111032
INTERNATIONAL FINANCE
BALANCE OF PAYMENT
Lists of Questions for Chapter 10.
1. What is BoP
2. Why BoP must be balance
3. Credit and debit sides
4. Types of transaction in each side
5. Example of accounting a transaction in BoP
6. BoP structure
7. What is CA?
8. What is the component of CA and provide the definitions
9. What are the consequences if a country continues to experience a trade deficit?
10. Explain the interrelation between current account and capital & financial account
11. The current account balance is synonymous with net foreign investment in national
income accounting.
12. How does a U.S. current account deficit can be caused by a net financial inflow to the
United States. In other words, how does a financial inflow cause a current account deficit for
the United States?
13. Is current account deficit a problem?
14. How is the current account related to a country’s business cycle and long run
economic growth?
15. How the US has borrowed at very low cost?
16. Do current account deficits cost Americans job?
16.a. Can current account deficit produce jobs?
17. Can the US continue to run current account deficits indefinitely?
18. Why is it necessary for the US to reduce its current account deficits?
19. Why does shrinking the U.S. current account deficit can be difficult.
20. What is the balance of international indebtedness?
21. Mention two reasons why the value of assets and liabilities change?
22. When is the US considered as net creditor to the rest of the world?
23. When is the US considered as net debtor to the rest of the world?
24. Of what use is the balance of international indebtedness?
25. Why are the short term investment position and the balance of official monetary
holdings significant?
26. A country can be a debtor nation then become a creditor nation back and forth. How
can this twist happen? Please explain from the US experience
27. why is the dollar so difficult to displace as the world’s main reserve currency?
28. Explain the substantial benefits from the dollar serving as the main reserve currency
of the world
29. Why are some experts argue that the dollar should no longer serve as the world’s
reserve currency?
30. Regarding the idea of new reserve currency, what had been proposed by China?
31. Why China wanted to replace Dollar with SDR?
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Download International Finance, Chapter 10 Carbaugh, Balance of Payment and more Exercises Payment Systems in PDF only on Docsity!

Name : Annisya Zahro Firdausa ID : 215020407111032 INTERNATIONAL FINANCE BALANCE OF PAYMENT Lists of Questions for Chapter 10.

  1. What is BoP
  2. Why BoP must be balance
  3. Credit and debit sides
  4. Types of transaction in each side
  5. Example of accounting a transaction in BoP
  6. BoP structure
  7. What is CA?
  8. What is the component of CA and provide the definitions
  9. What are the consequences if a country continues to experience a trade deficit?
  10. Explain the interrelation between current account and capital & financial account
  11. The current account balance is synonymous with net foreign investment in national income accounting.
  12. How does a U.S. current account deficit can be caused by a net financial inflow to the United States. In other words, how does a financial inflow cause a current account deficit for the United States?
  13. Is current account deficit a problem?
  14. How is the current account related to a country’s business cycle and long run economic growth?
  15. How the US has borrowed at very low cost?
  16. Do current account deficits cost Americans job? 16.a. Can current account deficit produce jobs?
  17. Can the US continue to run current account deficits indefinitely?
  18. Why is it necessary for the US to reduce its current account deficits?
  19. Why does shrinking the U.S. current account deficit can be difficult.
  20. What is the balance of international indebtedness?
  21. Mention two reasons why the value of assets and liabilities change?
  22. When is the US considered as net creditor to the rest of the world?
  23. When is the US considered as net debtor to the rest of the world?
  24. Of what use is the balance of international indebtedness?
  25. Why are the short term investment position and the balance of official monetary holdings significant?
  26. A country can be a debtor nation then become a creditor nation back and forth. How can this twist happen? Please explain from the US experience
  27. why is the dollar so difficult to displace as the world’s main reserve currency?
  28. Explain the substantial benefits from the dollar serving as the main reserve currency of the world
  29. Why are some experts argue that the dollar should no longer serve as the world’s reserve currency?
  30. Regarding the idea of new reserve currency, what had been proposed by China?
  31. Why China wanted to replace Dollar with SDR?
  1. Explain about the potential pitfalls of using the SDR as a reserve currency.
  2. If one day the US dollar is replaced by other means as the world reserve currency, what will be the consequences? ANSWER
    1. The balance-of-payments is a record of the economic transactions between the residents of one country and the rest of the world.
    2. Each credit entry is balanced by a debit entry, and vice versa, so that the recording of any international transaction leads to two offsetting entries. In other words, the balance-of-payments accounts utilise a double entry accounting system.
    3. A credit transaction is one that results in a receipt of a payment from foreigners. By convention, credit items are recorded with a plus sign. A debit transaction is one that leads to a payment to foreigners. By convention, debit items are recorded with a minus sign (–).
    4. From the U.S. perspective, the following transactions are credits (+), leading to the receipt of dollars from foreigners:
      • Merchandise exports
      • Transportation and travel receipts
      • Income received from investments abroad
      • Gifts received from foreign residents
      • Aid received from foreign governments
      • Investments in the United States by overseas residents Conversely, the following transactions are debits (–) from the U.S. viewpoint because they involve payments to foreigners:
      • Merchandise imports
      • Transportation and travel expenditures
      • Income paid on the investments of foreigners
      • Gifts to foreign residents
      • Aid given by the U.S. government
      • Overseas investment by U.S. residents
    5. A U.S. resident who owns bonds issued by a Japanese company receives interest payments of $10,000. With payment, the balances owned by New York banks at their Tokyo affiliate are increased. The impact of this transaction on the U.S. balance-of- payments would be as follows:
    6. Balance-of-payment Structure
      1. Current Account

deficit (debits outweigh credits) is offset by a net financial inflow (credits outweigh debits) in its capital and financial account.

  1. The current account balance is synonymous with net foreign investment in national income accounting. A current account surplus means an excess of exports over imports of goods, services, investment income, and unilateral transfers. This surplus permits a net receipt of financial claims for home nation residents. These funds can be used by the home nation to build its financial assets or to reduce its liabilities to the rest of the world, improving its net foreign investment position. A current account deficit implies an excess of imports over exports of goods, services, investment income, and unilateral transfers. This deficit leads to an increase in net foreign claims on the home nation. The home nation experiences foreign capital inflows and thus becomes a net demander of funds from abroad, the demand being met through borrowing from other nations or liquidating foreign assets. The result is a worsening of the home nation’s net foreign investment position.
  2. When foreigners start purchasing more of our assets than we are purchasing of theirs, the dollar becomes more costly in the foreign exchange market.This causes U.S. goods to become more expensive to foreigners, resulting in declining exports; foreign goods become cheaper to Americans, resulting in increasing imports. The result is a rise in the current account deficit or a decline in the current account surplus.
  3. A current account deficit has little to do with foreign trade practices or any inherent inability of a country to sell its goods on the world market. Instead, it is because of underlying macroeconomic conditions at home requiring more imports to meet current domestic demand for goods and services than can be paid for by export sales.Foreign capital inflows augment domestic sources of capital that in turn keep domestic interest rates lower than they would be without foreign capital. The benefit of a current account deficit is the ability to push current spending beyond current production. It can be a normal and healthy part of an economy or a country's activity in the fact (a country) has more importing than exporting. Large and persistent current account deficits can be a cause for several economics problems, For instance economic instability, reduced International competitiveness, increased reliance on foreign borrowing and reduced domestic savings.
  4. Rapid growth of production and employment is associated with growing trade and current deficit, while slow growth of production and employment is associated with growing surpluses. When the current account deficit reflects a strong profitable investment program it can cause a rise in the rate of output or production and employment growth. Current account is related to a country's economy growth a persistent current account deficit can lead to a decline in domestic savings which can reduce the funds available for domestic investment that can lead to limit the growth potential of economy.
  5. The United States has been able to be a large debtor nation without bearing negative debt service cost. This paradox suggests that the U.S. current account deficits might be less burdensome than often portrayed. The United States is generally considered as a safe haven for investment, foreign investors are more likely to buy U.S. assets that offer low return and low risk. The United States has borrowed at a very low cost because of the combination of factors: US Dollars status as the world's reserve

currency, US Government strong credit rating, the Federal Reserve's monetary policy, and global economic conditions.

  1. Since the current account deficit arises mainly because foreigners desire to purchase American assets, there is no economic reason why it cannot continue indefinitely. As long as the investment opportunities are large enough to provide foreign investors with competitive rates of return, they will be happy to continue supplying funds to the United States. There is no reason why the process cannot continue indefinitely: no automatic forces will cause either a current account deficit or a current accoun surplus to reverse.
  2. A current account deficit may hurt employment in particular firms and industries as workers are displaced by increased Imports. When viewed from the net inflow of foreign Investments, the current account deficits produce jobs. When we view macroeconomics, the current account deficit can cause change in composition of employment in the various sectors.
  3. It is necessary for the US to reduce its current account deficits in order to reduce its reliance on foreign capital and to improve its long-term economic stability. A sustained deficit can lead to a buildup of international indebtedness, a decline in the value of the US dollar, and potentially higher interest rates.
  4. Shrinking the US current account deficit can be difficult because it requires a reduction in domestic consumption or an increase in domestic savings, which can be politically unpopular and difficult to achieve. Additionally, the deficit can be driven by factors outside the control of the US, such as global economic imbalances or currency fluctuations.
  5. The balance of international indebtedness is a measure of a country's total stock of external debt and foreign-owned assets. It reflects the difference between a country's external assets and liabilities.
  6. The value of assets and liabilities can change due to shifts in exchange rates or changes in the underlying value of the assets or liabilities, such as changes in the market value of stocks or real estate.
  7. The US is considered a net creditor to the rest of the world when the value of its external assets exceeds the value of its external liabilities.
  8. The US is considered a net debtor to the rest of the world when the value of its external liabilities exceeds the value of its external assets.
  9. The balance of international indebtedness provides an overall picture of a country's external financial position and its exposure to external economic risks. It can be used to monitor a country's external borrowing and lending activity, as well as its overall level of international financial integration.
  10. The short-term investment position and the balance of official monetary holdings are significant because they can affect a country's ability to meet its international financial obligations and to manage its exchange rate. The short-term investment position measures a country's ability to meet its short-term external financial obligations, while the balance of official monetary holdings reflects a country's reserves of foreign currencies and its ability to manage exchange rate fluctuations.
  11. A country can switch from being a debtor nation to a creditor nation and back again due to a variety of factors such as changes in economic policies, fluctuations in commodity prices, and shifts in global economic conditions. For example, the US was a creditor nation after World War II due to its dominant position in the global economy and its large stock of external assets. However, in the 1980s, the US became a net