Business

Global Finance seminar question model solutions

1. What is a country’s balance of payments?

Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.

Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. The term "balance of payments" often refers to this sum: a country's balance of payments is said to be in surplus (the balance of payments is positive) by a certain amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter.

2. Give 3 problems with using purchasing power parity to predict future exchange rates?

1).Ignores tariffs, taxes and trade restrictions:

This theory ignores restrictions on foreign trade. This theory explains that the rate of exchange depends only upon the relative prices levels in the countries concerned. But it can be influenced by the trade restrictions also. For example, if a country imposes ban or import duties on the import of a large number of items then the prices of imported products would increase. During the early nineties, Japan imposed quotas and tariffs on beef imports that went as high as 70 percent.

2).Non-traded goods

When using the Law of One Price to derive PPP,...