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MGT 361

PASTYEAR EXAM QUESTIONSCHAPTER 5 : BALANCE OF

PAYMENT

BY :

SITI NURAMEELIA BINTI ZULKIFLI

NUR SHAFINAZ BINTI KAMARUDDIN

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APRIL 2007, APRIL 2008, OCTOBER 2010, SEPTEMBER 2013

PART A

Discuss the four accounts of the BOP accounting system and their

components. Give appropriate example for each of the account.

(10 marks)

There are 4 major accounts:

1. Current Account

2. Capital Account

3. Official Reserves Account

4. Errors and Omissions Account

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- Records 4 types of transaction:

i. Exports and imports of goods . For example cotton, rice.

if import > export (deficit)

If export > import (surplus)

ii. Exports and imports of services. For example banking services, health

services

iii. Investment incomeGovernment sell bond to foreigners to get money

iv. Gifts

private and public gifts between residents of one country and

another. Ex: Indonesia maid who send part of their earnings back

home to their relatives (private gift)

While government aid from Malaysia used for a tsunami victims in

Indonesia is consider as a public gift

1. CURRENT ACCOUNT

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2. CAPITAL ACCOUNT

Records purchases and sales of assets between residents of one country

and other countries

Can be divided into 2 (Foreign Direct Investment and Foreign Portfolio

Investment)

Maturity Motivation Typical Investment

Portfolio

(short-term)

1 year/ less Investment

income/

Facilitation of int.

commerce

Checking account balances

Bank loans

Time deposits

Portfolio(long-term) > 1 year Investmentincome Govt. notes and bondsCorporate stocks and bonds

FDI Indeterminate Active control of

organization

Foreign factories/ subsidiaries

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Debit (Outflow) Credit (Inflow)

Portfolio

(short-term)

Receiving a payment from a

foreigner

Making a payment to a foreigner

Portfolio

(long-term)

Buyinga long-term foreign asset

(not for purpose of control)

Sellinga domestic long-term

asset to a foreigner (not forpurpose of control)

FDI Buyinga foreign asset for a

purpose of control

Sellinga domestic asset to a

foreigner for purpose of control

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3. OFFICIAL RESERVES ACCOUNT

- Records the level of official reserve held by a national government.

- Official reserves comprise four types of assets :

1. Gold measure using a par value established by a countrys treasury or

finance ministry.

2. Convertible currencies currencies that are freely exchangeable in

world currency market.

3. SDRs - credits granted by the IMF that can be used to settle

transactions among central bank also called paper gold

4. Reserve position at the IMF quotas minus IMF borrowings

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4. ERRORS AND OMISSIONS

- Purpose of this account is to balance the account

- It is because some of trading activities are not recorded in the BOP

- Politically stable countries (US) often destination of flight capital,

money sent abroad by foreign residents seeking a safe haven for

their assets (to avoid any official recognition of their transactions,making it difficult for government BOP statisticians to record such

transactions.

- In theory, the following equality should be observed :

1. Current Account + Capital Account + Official Reserves Account

+1BILLION=0

2. Current Account + Capital Account + Official Reserves Account + Errors

and Omissions = 0

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OCTOBER 2009

PART A

6. Discuss four (4) reasons why Balance of Payment (BOP) statistics are

important to international business people. (10 marks)

i. Help identify emerging markets for goods and services

Emerging markets means that new market (country) is open to any

companies (from other countries) to do international business

It is because before this, country operate closed economy, for

example China

By looking at BOP, it will shows that a country is open to FDI if more

investment flowing into the country

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ii. Warn of possible new policies

BOP problem arises when an economy has to take loans in

order to balance the BOP.

It means that, there is deficit in BOP

BOP deficit leads to inflation

In order to curb inflation, government will restrict import and

encourage export (for example by giving export subsidies)

When a country restrict import, it indicate that other country

can not export its product to other country

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iii. Indicate reductions in a countrysforeign exchange reserves

When the official reserve account keep decreasing, it indicates

that a country lost it strength to face problems (e.g.: tsunami) in

the future

The amount of official reserve normally last for 10 years (if

anything happen in the country (e.g.: natural disaster), country

can survive by using its reserves)

So, country will face problem to develop its country.

iv. Risk of lending to particular countries

During economic downturn, there is possibility of unable to pay

loan to the World Bank

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APRIL 2010

PART B

QUESTION 1

b) Discuss the major components of the Balance of Payment Accounting

System (BOP). (15 marks)

There are 4 major accounts:

1. Current Account

2. Capital Account

3. Official Reserves Account

4. Errors and Omissions Account

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- Records 4 types of transaction:

i. Exports and imports of goods . For example cotton, rice.

if import > export (deficit)

If export > import (surplus)

ii. Exports and imports of services. For example banking services, health

services

iii. Investment incomeGovernment sell bond to foreigners to get money

iv. Gifts

private and public gifts between residents of one country and

another. Ex: Indonesia maid who send part of their earnings back

home to their relatives (private gift)

While government aid from Malaysia used for a tsunami victims in

Indonesia is consider as a public gift

1. CURRENT ACCOUNT

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2. CAPITAL ACCOUNT

Records purchases and sales of assets between residents of one country

and other countries

Can be divided into 2 (Foreign Direct Investment and Foreign Portfolio

Investment)

Maturity Motivation Typical Investment

Portfolio

(short-term)

1 year/ less Investment

income/

Facilitation of int.

commerce

Checking account balances

Bank loans

Time deposits

Portfolio(long-term) > 1 year Investmentincome Govt. notes and bondsCorporate stocks and bonds

FDI Indeterminate Active control of

organization

Foreign factories/ subsidiaries

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Debit (Outflow) Credit (Inflow)

Portfolio

(short-term)

Receiving a payment from a

foreigner

Making a payment to a foreigner

Portfolio

(long-term)

Buyinga long-term foreign asset

(not for purpose of control)

Sellinga domestic long-term

asset to a foreigner (not forpurpose of control)

FDI Buyinga foreign asset for a

purpose of control

Sellinga domestic asset to a

foreigner for purpose of control

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3. OFFICIAL RESERVES ACCOUNT

- Records the level of official reserve held by a national government.

- Official reserves comprise four types of assets :

1. Gold measure using a par value established by a countrys treasury or

finance ministry.

2. Convertible currencies currencies that are freely exchangeable in

world currency market.

3. SDRs - credits granted by the IMF that can be used to settle

transactions among central bank also called paper gold

4. Reserve position at the IMF quotas minus IMF borrowings

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4. ERRORS AND OMISSIONS

- Purpose of this account is to balance the account

- It is because some of trading activities are not recorded in the BOP

- Politically stable countries (US) often destination of flight capital,

money sent abroad by foreign residents seeking a safe haven for

their assets (to avoid any official recognition of their transactions,making it difficult for government BOP statisticians to record such

transactions.

- In theory, the following equality should be observed :

1. Current Account + Capital Account + Official Reserves Account

+1BILLION=0

2. Current Account + Capital Account + Official Reserves Account + Errors

and Omissions = 0

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GRAPH OF PAST SEMESTER QUESTIONS (BALANCE OF PAYMENT)

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FORECAST QUESTION

Discuss the major components of the Balance of Payment Accounting System

(BOP). (15 marks)

There are 4 major accounts:

1. Current Account

2. Capital Account

3. Official Reserves Account

4. Errors and Omissions Account

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- Records 4 types of transaction:

i. Exports and imports of goods . For example cotton, rice.

if import > export (deficit)

If export > import (surplus)

ii. Exports and imports of services. For example banking services, health

services

iii. Investment incomeGovernment sell bond to foreigners to get money

iv. Gifts

private and public gifts between residents of one country and

another. Ex: Indonesia maid who send part of their earnings back

home to their relatives (private gift)

While government aid from Malaysia used for a tsunami victims in

Indonesia is consider as a public gift

1. CURRENT ACCOUNT

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2. CAPITAL ACCOUNT

Records purchases and sales of assets between residents of one country

and other countries

Can be divided into 2 (Foreign Direct Investment and Foreign Portfolio

Investment)

Maturity Motivation Typical Investment

Portfolio

(short-term)

1 year/ less Investment

income/

Facilitation of int.

commerce

Checking account balances

Bank loans

Time deposits

Portfolio

(long-term)

> 1 year Investment

income

Govt. notes and bonds

Corporate stocks and bonds

FDI Indeterminate Active control of

organization

Foreign factories/ subsidiaries

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Debit (Outflow) Credit (Inflow)

Portfolio

(short-term)

Receiving a payment from a

foreigner

Making a payment to a foreigner

Portfolio

(long-term)

Buyinga long-term foreign asset

(not for purpose of control)

Sellinga domestic long-term

asset to a foreigner (not forpurpose of control)

FDI Buyinga foreign asset for a

purpose of control

Sellinga domestic asset to a

foreigner for purpose of control

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3. OFFICIAL RESERVES ACCOUNT

- Records the level of official reserve held by a national government.

- Official reserves comprise four types of assets :

1. Gold measure using a par value established by a countrys treasury or

finance ministry.

2. Convertible currencies currencies that are freely exchangeable in

world currency market.

3. SDRs - credits granted by the IMF that can be used to settle

transactions among central bank also called paper gold

4. Reserve position at the IMF quotas minus IMF borrowings

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4. ERRORS AND OMISSIONS

- Purpose of this account is to balance the account

- It is because some of trading activities are not recorded in the BOP

- Politically stable countries (US) often destination of flight capital,

money sent abroad by foreign residents seeking a safe haven for

their assets (to avoid any official recognition of their transactions,making it difficult for government BOP statisticians to record such

transactions.

- In theory, the following equality should be observed :

1. Current Account + Capital Account + Official Reserves Account

+1BILLION=0

2. Current Account + Capital Account + Official Reserves Account + Errors

and Omissions = 0