The most common exam, essay-type questions answered in full. Using these notes I received an overall distinction for Economics 244. Each topic question for the section has been answered. These are the notes I used based on my own idea of how to answer the questions.
PROBLEM 1: WHAT ROLE COULD INTERNATIONAL FINANCE PLAY IN
SUSTAINING ECONOMIC GROWTH?
Question 1.2
Explain the interaction between the current and financial accounts on the Balance of Payments.
What are the implications of BOP imbalances for a country’s exchange rate?
Balance of Payments
BoP is a periodic statement of the monetary value of all transactions between the
residents of one country and the residents if another country for a specific period.
A transaction on the BoP is any transfer between a countries resident and non-resident
of a valuable item, service or asset (tangible/ intangible) that can be measured in
money terms and the associated payment for it.
In any transaction, one person provides a good/ service/ financial asset while the other
provides money in exchange
Based on the double entry system where each transaction in the current account and
financial account corresponds to a transaction in the foreign exchange market (for this
reason the BoP always balances)
Accounting principles
a) Debit (Dt)
used for an inward flow of a valuable item and a payment that is made to a non-
resident (money flows out of the country).
In the case of a debit on SA’s BoP it creates a supply of Rand and a demand for
foreign exchange.
Minus (-) on BoP
b) Credit (Ct)
An outward flow of a valuable item and a payment that is received from a non
resident (money flows into the country)
Creates a demand for Rand and a supply of foreign exchange
PIus (+) on BoP
Current account:
Exports and imports of goods;
SA has a current account deficit (import/payments > exports/receipts);
a) Receipts/Exports
CR current account
, Service receipts, Income receipts
b) Payments/imports
DR current account
Payment for services, income payments
c) Current transfer
For example, donations
Donations to... (Dt
Donations receive from (Cr)
Capital transfer account
E.g. transfer of ownership of fixed assets. (Relatively unimportant account.)
Financial account
Assets of South Africans that invest abroad, as well as assets of foreigners that invest in SA
(liabilities).
a) Direct investment
In theory: Purpose of investment is controlling interest.
In practice: 10% of voting rights.
Foreign countries buy shares in SA company (Ct)
SA company buys shares in foreign countries (Dt)
b) Portfolio investments
Purpose of investment is financial return only
Short term
c) Other investments
Trade credits, loans, currency, deposits, other assets and liabilities
d) Reserve Asset Account
Classified as an asset account and therefore
Inflow of money (Dt official reserves)
Outflow of money (Ct official reserves)
NB! An exchange rate is the value of one country’s currency in terms of the currencies
of other countries: It has an impact on:
Exports, which increase when currency depreciates
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