OpenTuition | ACCA | CIMA

Free ACCA and CIMA on line courses | Free ACCA, CIMA, FIA Notes, Lectures, Tests and Forums

Balance of payments

Forums › Ask CIMA Tutor Forums › Ask CIMA BA1 Tutor Forums › Balance of payments

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by Ken Garrett.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • June 7, 2019 at 10:46 pm #519731
    anonymous570

    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 Japan

    D
    A is a visible transaction
    B is an invisible transaction
    C is an invisible transaction
    D is a capital flow

    Now, 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.

    June 8, 2019 at 11:59 am #519828
    Ken Garrett
    Keymaster

    I think the question depends on the word ‘appear’ rather than ‘affect’.

    June 8, 2019 at 1:12 pm #519835
    anonymous570

    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.

    June 9, 2019 at 6:39 pm #520018
    Ken Garrett
    Keymaster

    That is correct.

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Balance of payments’ is closed to new replies.