Question 1. There are 6 statements below. For each statement state whether it is

Question

Question 1. There are 6 statements below. For each statement state whether it is true or false and justify you reasoning. You get credit based on your reasoning! Services transactions on Canada's balance-of-payments statement would include Canadian ships transporting lumber to Japan, foreign tourists spending money in Canada, and Canadian engineers designing bridges in China. a. b. A positive balance on the goods-and-services account of the balance of payments indicates an excess of exports over imports which must be added to the nation's gross domestic product. c. On the U.S. balance-of-payments statement, a capital inflow would occur if a Swiss resident purchases the securities of the U.S. government If Toyota Inc. of Japan builds an automobile assembly plant in the United States, the Japanese capital account would register an outflow. d. e. If Bank of America receives repayment for a loan it made to a Mexican firm, the U.S. capital account would register an inflow. f. If a country realizes a current-account deficit in its balance of payments, it becomes a net supplier of funds to the rest of the world.

Explanation / Answer

The current account of a BOP records all transactions between residents of the country and rest of the world relating to export and import of goods and services and unilateral transfers during a given period of time. Components of current A/c are- Export and Import of goods (Visible trade) where a payment is recorded as a debit and receipt as credit Export and Import of services (Invisible trade- they are mainly of three kinds i.e. shipping, banking and insurance) Payments for such services comes as a reduction and recepits comes as an addition.Unilateral transfers are one way transactions like gifts, donations etc.Recipt of such a transaction is debit and vice versa.

Now, a capital account of BOP records transactions between residents of a country and rest of the world that cause a change in liabilities/ assets of the resident's country/govt. Components are - Borrowings (credit)/ Lendings(debit) to/ from abroad. Investments to/from abroad and change in foreign exchnage reserves.

a- True because as mentioned previously these will cme under services of current account. Shipping services to Japan comes as credit, Tourism i.e. inetrnational services comes a credit and construction services to China also come as a credit.

b- True because the components of GDP for an open economy are:

GDP= C (Consumption) + I (Investment) + G (Goevrnment expenditure) + NX ( Exports- Imports)

Hence an excess of exports over imports indicates addition to a nation's GDP.

c- True, because an investment in domestic country's asset by ROW brings in foreign exchange (credit transaction) and hence as mentioned previously, becomes a part of the capital account.

d- True. The capital account registers an outflow because setup of such a plant is a form of foreign direct investment and hence is capital outflow.

e- True, becasue this transaction reduces our liability and hence goes in the capital account of BOP as a credit transaction.

f- True because a current account deficit occurs when debit items are more than credit items and there is hence a net outflow of foreign exchange.

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