Chapter3 - CHAPTER 3 BALANCE OF PAYMENTS SUGGESTED ANSWERS...

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CHAPTER 3 BALANCE OF PAYMENTS SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Define the balance of payments. Answer: The balance of payments (BOP) can be defined as the statistical record of a country’s international transactions over a certain period of t ime p re sen ted in the fo rm o f doub le -en t ry bookkeeping. 2. Why would it be useful to examine a country’s balance of payments data?
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Answer: Japan’s continuous current account surpluses may have reflected a weak yen and high competitiveness of Japanese industries. Massive capital exports by Japan prevented yen from appreciating more than it did. At the same time, foreigners’ exports to Japan were hampered by closed nature of Japanese markets. Continuous current account surpluses disrupt free trade by promoting protectionist sentiment in the deficit country. It is not desirable especially when it is brought about by the mercantilist policies. 5. Comment on the following statement: “Since the U.S. imports more than it exports, it is necessary for the U.S. to import capital from foreign countries to finance its current account deficits.” Answer: The statement presupposes that the U.S. current account deficit causes its capital account surplus. In reality, the causality may be running in the opposite direction: U.S. capital account surplus may cause the country’s current account deficit. Suppose foreigners find the U.S. a great place to invest and send their capital to the U.S., resulting in U.S. capital account surplus. This capital inflow will strengthen the dollar, hurting the U.S. export and encouraging imports from foreign countries, causing current account deficits. 6.
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Chapter3 - CHAPTER 3 BALANCE OF PAYMENTS SUGGESTED ANSWERS...

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