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Eland is a small economy with a high per capita income. It has a high trade ratio with both imports and exports being a high proportion of gross domestic product. The economy is an open one with low trade barriers and no significant controls on the international movement of capital. The current and capital accounts of the balance of payments are currently in balance. Multinational companies are generally welcomed by Eland.
Other things being equal, the direct effect of an economic process on Eland’s balance of payments current and capital accounts could be:
a move towards surplus
a move towards deficit
no effect
Question
1. Use the Plan answer button top-right of this screen to open the word processor area and scroll down to access the word processor box. Then, note the correct direct effect for each of the following economic processes on the current and capital accounts.Economic process
Current account Capital account
significant rise in consumer expenditure in
Eland’s trading partners.A large rise in interest rates in Eland.
Investment by a multinational oil company
in an offshore oilfield in Eland.Increased remittance of profits of foreign
companies in Eland back to their parent companies.Note: The total marks will be split equally between each part.
The current account consists of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers, and investment income (income from factors such as land or foreign shares).
The components of the capital account include foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital.
1 If trading partners buy more from Eland this will increase the current account surplus. Capital account is unaffected.
2 If interest rates rise in Eland this will mean foreign entities will move money to Eland to enjoy higher income. So the capital account moves towards surplus. However, high interest rates reduce consumer expenditure and this will imply fewer goods are imported, The current account also moves towards surplus.
3 No effect on the current account. Capital has been moved into the country through investment so the capital account moves towards surplus.
4 This income being remitted abroad is part of the current account and money leaving will move this towards deficit. No effect on the capital account
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