Ibu 702

Chapter 3

1. Define balance of payments.

Balance of payment is the statistical record of a country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping.

2. Why would it be useful to examine a country’s balance-of payments data?

There are three reasons why is good to examine country’s balance of payment:

a) Balance of payment provides detailed information concerning the demand and supply of a country’s currency.

b) A country’s balance-of-payments data may signal its potential as a business partner for the rest of the world.

c) Balance-of-payments data can be used to evaluate the performance of the country in international economic competition

3. The United States has experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous U.S. current account deficits?

The reasons why U.S. is experiencing continuous current account deficits could be because the competition in U.S. industries is weak. Also, it could be because interest rate in the U.S. was high throughout the history and that kept the dollar strong.

4. In contrast to the United States, Japan has realized continuous current account surpluses. What could be the main cause for their surpluses? Is it desirable to have continuous current account surpluses?

Japan’s continuous current account surplus could be because the competition in Japan industries is high. It could also be because the Japanese yen is weak. It is not desirable to have continuous current account surpluses because it disrupts free trade in deficit country.

5. Comment on the following statement: “Since the United States imports more than it exports, it is necessary for the United States to import capital from foreign countries to finance its current account deficits.”

From this statement we can see that U.S account surplus is causing country’s...