<<Balance of Payment>> Exports : Goods, Services Imports : Goods, Services Inoco

Question

<<Balance of Payment>>

Exports : Goods, Services

Imports : Goods, Services

Inocome received (inward)

Income paid (outward)

Transfers received (inward)

Transfers paid (outward)

Inward of foreign Investment : Portfolio, Direct

Outward foreign investment : Portfolio, Direct

1. Income paid (outward) is larger than Income received (inward). Exaplin why.

2. Real depreciated against other currencies. given time, which entries would expect to change and which direction?

3. Nominal exchange rate was fixed, but inflation is higher. which entries would expect to change and which direction?

4. A country experienced a deep recession. which entries would expect to change and which direction?

Explanation / Answer

Balance payment records the inflow and outflow of payment.

1) Inocme paid is larger than income received means the economy's imports are greater than exports. When goods are imported the income is paid to other nation and there is outflow of income and the reverse is for exports.

2) If real depriciated, then this means the economy's currency is cheaper than other nation's currency. This would have the following two impacts:

3) Increase in inflation means fall in real interest rate. The inflow of investment will fall. There will be greater outflow of investment.

4) Economy experiencing recession would have both lower inflow of investment and outflow of investment & greater imports ( outward income). This is because there will be lower production and investment activities during recession.

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