6 7 define an implicit price deflator and discuss the

(6)
7. Define an implicit price deflator and discuss the advantages and disadvantages
of implicit price deflators compared to explicit price indices.
(6)
8. Compare the GDE deflator, GDP deflator and GNI deflator by emphasising their
respective advantages and disadvantages.
(6)
9. Provide examples of some of the frequent mistakes in reporting on and
interpreting inflation data.
(4)
Answers to true/false questions
1F 11T 21T 31F 41T 51T 61F 71F
2F 12T 22F 32T 42T 52F 62T 72F
3T 13F 23T 33T 43F 53T 63T 73F
4F 14T 24T 34T 44T 54F 64T 74F
5T 15T 25T 35T 45F 55T 65T 75F
6F 16F 26F 36T 46F 56T 66T
7T 17T 27F 37T 47T 57T 67T
8F 18T 28T 38F 48T 58T 68F
9T 19F 29F 39F 49T 59T 69T
10T 20T 30F 40T 50F 60T 70F

42 | P a g e
Learning Unit 8
INTERNATIONAL TRANSACTIONS
Prescribed material
The whole of chapter 7 is prescribed for the course. You should concentrate on the topics
emphasised in the discussion of the chapter contents.
Purpose
To explain the most important indicators related to South Africa's links with the rest of the world,
particularly the balance of payments, terms of trade and exchange rates.
Learning outcomes
Once you have studied this chapter, you should be able to
• define the balance of payments and its main subaccounts
• list the main categories of items recorded in the current account of the balance of payments
• list the main categories of items recorded in the financial account of the balance of payments
• explain the difference between a change in net gold and other foreign reserves and a change in
gross gold and other foreign reserves
• explain why the balance of payments always balances
•
explain how different types of transactions are recorded in the balance of payments
• explain what is meant by the “openness” of an economy and mention some indicators or measures
of openness
• define the terms of trade and explain their significance
• explain the difference between direct and indirect quotation of exchange rates; bilateral and
effective exchange rates; real and nominal exchange rates; exchange rate appreciation and
depreciation; spot and forward exchange rates
• calculate bilateral real exchange rates and interpret the results
• explain how nominal and real effective exchange rates are calculated
• define purchasing power parity (PPP) and explain the difference between absolute
• PPP and relative PPP
• calculate bilateral PPP exchange rates and interpret the results
Contents
In this chapter we will focus on various concepts and indicators to arrive at a better understanding of
the data pertaining to foreign transactions.
Section 7.1 is a long section on the balance of payments. In June 1999 the classification of the South
African balance of payments was revised substantially.
You must be able to define the balance of payments and to explain why it is such an important
indicator of the state of the economy.