Theory question 101
Balance of Payments and Exchange RatesThe table below shows an extract from balance of payments for country A. Use the table to answer the questions that follow:
Balance of payments Items
Items of transactions | Receipts ($) | Payments ($)
1. Merchandise (Visible trade) | 52,000.00 | 40,000.00
2. Shipping, other transport and travel | 4,000.00 | 8,000.00
3. Investment income | 20,000.00 | 5,000.00
4. Other services | 2,500.00 | 7,500.00
5. Unrequited transfers | 22,800.00 | 7,000.00
6. Direct investment | 50,000.00 | 26,000.00
7. Other long-term capital | 254,000.00 | 289,000.00
8. Short-term capital | 221,000.00 | 238,000.00
Calculate the: (a) balance of trade; (b) balance on current account; (c) balance on capital account; (d) balance of payments.
Show the model answer
(a) Balance of trade = visible exports − visible imports = 52,000 − 40,000 = $12,000 (surplus)
(b) Current account (items 1–5): receipts 52,000 + 4,000 + 20,000 + 2,500 + 22,800 = $101,300; payments 40,000 + 8,000 + 5,000 + 7,500 + 7,000 = $67,500; balance = +$33,800
(c) Capital account (items 6–8): receipts 50,000 + 254,000 + 221,000 = $525,000; payments 26,000 + 289,000 + 238,000 = $553,000; balance = −$28,000
(d) Balance of payments = 33,800 − 28,000 = +$5,800 (surplus)
Current account: goods, services, income and transfers; capital account: investment and capital flows.