Chapter 4 Notes - Chapter 4 The Balance of Payments...

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Chapter 4 The Balance of Payments Questions 4-1. Balance of Payments Defined. The measurement of all international economic transactions between the residents of a country and foreign residents is called the balance of payments (BOP). What institution provides the primary source of similar statistics for balance of payments and economic performance worldwide? The primary source of similar statistics for balance of payments and economic performance worldwide is the International Monetary Fund, Balance of Payments Statistics . 4-2. Importance of BOP. Business managers and investors need BOP data to anticipate changes in host country economic policies that might be driven by BOP events. From the perspective of business managers and investors list three specific signals that a country’s BOP data can provide. The BOP is an important indicator of pressure on a country’s foreign exchange rate, and thus on the potential for a firm trading with or investing in that country to experience foreign exchange gains or losses. Changes in the BOP may predict the imposition or removal of foreign exchange controls. Changes in a country’s BOP may signal the imposition or removal of controls over payment of dividends and interest, license fees, royalty fees, or other cash disbursements to foreign firms or investors. The BOP helps to forecast a country’s market potential, especially in the short run. A country experiencing a serious trade deficit is not likely to expand imports as it would if running a surplus. It may, however, welcome investments that increase its exports. 4-3. Economic Activity. What are the two main types of economic activity measured by a country’s BOP? Current transactions having cash flows completed within one year, such as for the import or export of goods and services. Capital and financial transactions, in which investors acquire ownership of a foreign asset, such as a company, or a portfolio investment, such as bonds or shares of common stock. 4-4. Balance. Why does the BOP always “balance”? The algebraic sum of all flows accounted for in the current account and the capital and financial accounts should, in theory, equal changes in a country’s monetary reserves. Because data for the balance of payments is collected on a single entry basis and some data is missed, the equalization usually does not occur. The imbalance is plugged by an entry called “errors and omissions,” which makes the accounts balance.
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18 Eiteman/Stonehill/Moffett • Multinational Business Finance, Twelfth Edition 4-5. BOP Accounting. If the BOP were viewed as an accounting statement, would it be a balance sheet of the country’s wealth, an income statement of the country’s earnings, or a funds flow statement of money into and out of the country?
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