There are three sections of the balance of payments (BOP) accounts: current acco
ID: 1174160 • Letter: T
Question
There are three sections of the balance of payments (BOP) accounts: current account (U), financial/capital account (l), and changes in official reserve account (II). Match the following transactions with each of the BOP sections. Also indicate increase or decrease by a (+) or (-) as it relates to US BOP (2 points each) (a) Home country sells merchandise overseas (b) A US citizen bought a plant in Mexico US Central Bank bought some foreign currencies, the Yuan (c) (d) (e) An Asian, a US resident sent $1,000.00 to his mother living in Hong Kong. A Saudi citizen bought a hotel in Manhattan (t) (g) The Bank of Japan purchased some US bonds paying in $ A US investor earned a return on his investment in Germany 7-1 Assume that the actual (nominal) exchange rate of the dollar to the British pound (S/E) in 2017 1.47; the exchange rate S/E for 2010 (the base year) = $1.60, price index (PI) US in 2017- 154.5, and PI UK in 2017 148.8 (a) What is the real exchange rate in 2017? (3 points) (b) Did the US gain competitive advantage or disadvantage in the world market? (2 points) (c) What is the relative purchasing power parity PPP re for S/E in the year 2017? (4 points) (d) Was the dollar overvalued or undervalued in 2017? (2 points)Explanation / Answer
1.
(a) All merchandise sells overseas would come under current account.
(b) Financial assets or factories purchased by a domestic citizen in another country will come under capital account.
(c) US central bank bought foreign reserves come under a change in an official reserve account.
(d) Remittances send to domestic country comes under current account.
(e) A Saudi buying an asset or property in another country would come under capital account.
(f) US investor earns returns on his investment in Germany would be under capital account.
(g) Bank of Japan purchased some US bonds paying in dollars would change official reserves, as well as bonds, are purchased from another country so the capital account would also be credited.
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