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Kaplan Exam Kit has the following question and answer. I’m not really sure why exactly the answer is D. My reasoning is below. Please correct me and explain, I’d really appreciate it. Thanks.
Which one of the following will appear in the financial account of the balance of payments for Japan?
A) The export of whisky
B) The purchase of Euros to go on a European holiday
C) Interest received on a United States government bond
D) Inflow of investment by a hi-tech multinational into JapanD
A is a visible transaction
B is an invisible transaction
C is an invisible transaction
D is a capital flowNow, the way I see it is that the balance of payments “accounts equation” from the lecture notes is the following.
Current account + Capital account = Financial account
A: an export would count as a visible transaction and there’d be a flow related to trade entering Japan, so it would affect the Current account and (therefore) the Financial account.
B: buying Euros would count as an invisible transaction and there’d be a flow related to trade leaving Japan, so it would also affect the Current account and (therefore) the Financial account.
C: interest received on a US government bond would count as an invisible transaction and there’d be a flow related to income entering Japan, so it would affect the Current account and (therefore) the Financial account.
D: inflow of investment by a hi-tech multinational into Japan would count as a capital flow and there’d be a flow related to investment entering Japan, so it would affect the Capital account and (therefore) the Financial account.
My point is that in all cases, there’s one account affected on the left side of the balance of payments “accounts equation”, so then the Financial account has to be affected, making all of A,B,C,D appear in the Financial account of the balance of payments.I think the question depends on the word ‘appear’ rather than ‘affect’.
Ok, thanks,
I’ve been doing some looking up on BOP formula, which actually seems to be instead simply equal to the sum of the balances of all three accounts, i.e. balance of payments formula equals
Current account balance + Capital account balance + financial account balance
The Lecture Notes suggests otherwise, as my original post says. Please clarify. Thanks.A: An export is a visible transaction coming under the BOT (exports subtract imports, making up the bulk of a country’s BOP), so appearing in the Current account.
B: Buying Euros is an invisible transaction coming under the BOT, once again, so appearing in the Current account.
C: Interest received (or paid on capital) comes is a Current account transaction, so appearing in the Current account.
D: Inflow of investment by a hi-tech multinational into Japan is a Financial account transaction.
Reasoning is that the Financial account concerns international monetary flows related to investment in business, real estate, bonds and stocks. The flows include direct investment, portfolio investment and reserve assets.So, I can now see why D, the inflow of investment, would appear in the Financial account.
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