balance of payment
CHAPTER 3 BALANCE OF PAYMENTS
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
QUESTIONS
1. Define the balance of payments.
Answer: The balance of payments (BOP) can be de fined as the statistical record of a country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping. 2. Why would it be useful to examine a country’s balance of payments data?
It Answer: would be useful to examine a country’s
BOP for at least two reasons. First, BOP provides detailed information about the supply and demand of the country’s currency. Second, BOP data can be used to evaluate the performance of the country in international economic competition. For example, if a country is experiencing perennial
BOP deficits, it may signal that the country’s industries lack competitiveness. 3. The United States has experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous U.S. current account deficits?
Answer: The current account deficits of U.S. may ha ve reflected a few reasons such as (I) a historically high real interest rate in the U.S., which is due to ballooning federal budget deficits, that kept the dollar strong, and (ii) weak competitiveness of the U.S. industries.
? 4. In contrast to the U.S., Japan has realized continuous current account surpluses. What could be the main causes for these surpluses? Is it desirable to have continuous current account surpluses?
Answer: Japan’s continuous current account surp luses may have reflected a weak yen and high competitiveness of Japanese industries. Massive capital exports by Japan prevented yen from appreciating more than it did. At the same time, foreigners’ expor ts to Japan were hampered by closed nature of
Japanese markets. Continuous current account surplu ses disrupt free trade by promoting
SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER
QUESTIONS AND PROBLEMS
QUESTIONS
1. Define the balance of payments.
Answer: The balance of payments (BOP) can be de fined as the statistical record of a country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping. 2. Why would it be useful to examine a country’s balance of payments data?
It Answer: would be useful to examine a country’s
BOP for at least two reasons. First, BOP provides detailed information about the supply and demand of the country’s currency. Second, BOP data can be used to evaluate the performance of the country in international economic competition. For example, if a country is experiencing perennial
BOP deficits, it may signal that the country’s industries lack competitiveness. 3. The United States has experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous U.S. current account deficits?
Answer: The current account deficits of U.S. may ha ve reflected a few reasons such as (I) a historically high real interest rate in the U.S., which is due to ballooning federal budget deficits, that kept the dollar strong, and (ii) weak competitiveness of the U.S. industries.
? 4. In contrast to the U.S., Japan has realized continuous current account surpluses. What could be the main causes for these surpluses? Is it desirable to have continuous current account surpluses?
Answer: Japan’s continuous current account surp luses may have reflected a weak yen and high competitiveness of Japanese industries. Massive capital exports by Japan prevented yen from appreciating more than it did. At the same time, foreigners’ expor ts to Japan were hampered by closed nature of
Japanese markets. Continuous current account surplu ses disrupt free trade by promoting