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7/27/2019 Balance of payment uitm
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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