2 THE BALANCE OF PAYMENTS

The balance of payments(BOP) as applied to a course in international finance may be defined as:

• the amount still owed by an exporting firm after making an initial down payment.

• the amount still owed by governments to the International Monetary Fund.

• the measurement of all international economic transactions between the residents of a country and foreign residents.

• the amount of a country's merchandise trade deficit or surplus.

Which of the following international transactions would NOT be counted as a BOP transaction?

• A Malaysian tourist purchases durians in Teluk Bahang, Penang.

• The Malaysian subsidiary of a British firm pays profits (dividends) back to its parent firm in London.

• A Canadian lumber baron purchases a Malaysian corporate bond through an investment broker in Kuala Lumpur.

• All of the above are considered BOP transactions.

The largest single component of the current account is:

• current transfers.

• income payments and receipts.

• goods imports and exports.

• services imports and exports.

Portfolio investment is capital invested in activities that are ________ rather than made for

________.

• short term; the long term

• long term; profit

• profit motivated; control

• control motivated; profit

Under the floating exchange rate regime,

• the combined balance on the current and financial accounts will be equal in size, but opposite in sign, to the change in the official reserves.

• the balance on the current and financial accounts will be equal in size, but opposite in sign.

• a current account surplus or deficit must be matched by an official reserves deficit or surplus.

• a financial account surplus or deficit must be matched by an official reserves deficit or surplus.

The financial account may be divided into 3 categories:

• cross-border mergers and acquisitions, portfolio investment, and other asset investment.

• foreign direct investment, portfolio investment, and cross-border mergers and acquisitions.

• foreign direct investment, mergers and acquisitions, and other asset investment.

• foreign direct investment, portfolio investment, and other asset investment.

Generally speaking, any transaction that results in a receipt from foreigners:

• will be recorded as a credit, with a positive sign, in the U.S. BOP.

• will be recorded as a debit, with a negative sign, in the U.S. BOP.

• will be recorded as a debit, with a positive sign, in the U.S. BOP.

• will be recorded as a credit, with a negative sign, in the U.S. BOP.

A high home inflation rate relative to other countries would ____ the home country's current account balance, other things being equal. High growth in the home income level relative to other countries would ____ the home country's current account balance, other things being equal.

• increase; increase

• increase; decrease

• decrease; decrease

• decrease; increase

Which of the following scenarios will result in a BOP deficit? (assuming everything else remains constant)?

• A decrease in the country's rate of inflation.

• A decrease in the country's national income level.

• An increase in government restrictions in the form of tariffs or quotas.

• An appreciation of the country's currency.

The ____ is the difference between exports and imports.

• balance of trade

• balance on goods and services

• balance of payments

• current account