国际财务管理课后习题答案chapter 3

CHAPTER3BALANCEOFPAYMENTSSUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

Definethebalanceofpayments.

Answer: Thebalanceofpayments(BOP)canbedefinedasthestatisticalrecordofacountry’s

internationaltransactionsoveracertainperiodoftimepresentedintheformofdouble-entrybookkeeping.

Whywoulditbeusefultoexamineacountry’sbalanceofpaymentsdata?

Answer:Itwouldbeusefultoexamineacountry’sBOPforatleasttworeaso ns.First,BOPprovidesdetailedinformationaboutthesupplyanddemandofthecountry’scurrency.Second,BOPdatacanbeusedtoevaluatetheperformanceofthecountryininternationaleconomiccompetition.Forexample,ifacountryis experiencingperennialBOPdeficits,itmaysignalthatthecountry’sindustrieslackcompetitiveness.

TheUnitedStateshasexperiencedcontinuouscurrentaccountdeficitssincetheearly1980s.Whatdoyouthinkarethemaincausesforthedeficits?WhatwouldbetheconsequencesofcontinuousU.S.currentaccountdeficits?

Answer:ThecurrentaccountdeficitsofU.S.mayhavereflectedafewreasonssuchas(I)ahistoricallyhighrealinterestrateintheU.S.,whichisduetoballooningfederalbudgetdeficits,thatkeptthedollarstrong,and(ii)weakcompetitivenessoftheU.S.industries.

IncontrasttotheU.S.,Japanhasrealizedcontinuouscurrentaccountsurpluses.Whatcouldbethemaincausesforthesesurpluses?Isitdesirabletohavecontinuouscurrentaccountsurpluses?

Answer:Japan’scontinuouscurrentaccountsurplusesmayhavereflectedaweakyenandhighcompetitivenessofJapaneseindustries.MassivecapitalexportsbyJapanpreventedyenfromappreciatingmorethanitdid.Atthesametime,foreigners’exportstoJapanwerehamperedbyclosednatureofJapanesemarkets.Continuouscurrentaccountsurplusesdisruptfreetradebypromotingprotectionist

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sentimentinthedeficitcountry.Itisnotdesirableespeciallywhenitisbroughtaboutbythemercantilistpolicies.

Commentonthefollowingstatement:“SincetheU.S.importsmorethanitexports,itisnecessaryfortheU.S.toimportcapitalfromforeigncountriestofinanceitscurrentaccountdeficits.”

Answer: ThestatementpresupposesthattheU.S.currentaccountdeficitcausesitscapitalaccountsurplus.Inreality,thecausalitymayberunningintheoppositedirection:U.S.capitalaccountsurplusmaycausethecountry’scurrentaccountdeficit.SupposeforeignersfindtheU.S.agreatplacetoinvestandsendtheircapitaltotheU.S.,resultinginU.S.capitalaccountsurplus.Thiscapitalinflowwillstrengthenthedollar,hurtingtheU.S.exportandencouragingimportsfromforeigncountries,causingcurrentaccountdeficits.

Explainhowacountrycanrunanoverallbalanceofpaymentsdeficitorsurplus.

Answer: AcountrycanrunanoverallBOPdeficitorsurplusbyengagingintheofficialreservetransactions.Forexample,anoverallBOPdeficitcanbesupportedbydrawingdownthecentralbank’sreserveholdings.Likewise,anoverallBOPsurpluscanbeabsorbedbyaddingtothecentralbank’sreserveholdings.

Explainofficialreserveassetsanditsmajorcomponents.

Answer: Officialreserveassetsarethosefinancialassetsthatcanbeusedasinternationalmeansofpayments.Currently,officialreserveassetscomprise:(I)gold,(ii)foreignexchanges,(iii)specialdrawingrights(SDRs),and(iv)reservepositionswiththeIMF.Foreignexchanges arebyfarthemostimportantofficialreserves.

Explainhowtocomputetheoverallbalanceanddiscussitssignificance.

Answer:TheoverallBOPisdeterminedbycomputingthecumulativebalanceofpaymentsincludingthecurrentaccount,capitalaccount,andthestatisticaldiscrepancies.TheoverallBOPissignificantbecauseitindicatesacountry’sinternationalpaymentgapthatmustbefinancedbythegovernment’sofficialreservetransactions.

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Sincetheearly1980s,foreignportfolioinvestorshavepurchasedasignificantportionofU.S.treasurybondissues.Discusstheshort-termandlong-termeffectsofforeigners’portfolioinvestmentontheU.S.balanceofpayments.

Answer:AsforeignerspurchaseU.S.Treasurybonds,U.S.BOPwillimproveintheshortrun.Butinthelongrun,U.S.BOPmaydeterioratebecausetheU.S.shouldpayinterestsandprincipalstoforeigners.IfforeignfundsareusedproductivelyandcontributestothecompetitivenessofU.S.industries,however,U.S.BOPmayimproveinthelongrun.

Describethebalanceofpaymentsidenatnidtydiscussitsimplicationsunderthefixedandflexibleexchangerateregimes.

Answer:Thebalanceofpaymentsidentityholdsthatthecombinedbalanceonthecurrentandcapitalaccountsshouldbeequalinsize,butoppositeinsign,tothechangeintheofficialreserves:BCA+BKA

=-BRA.Underthepureflexibleexchangerateregime,centralbanksdonotengageinofficialreservetransactions.Thus,theoverallbalancemustbalance,i.e.,BCA=-BKA.Underthefixedexchangerateregime,however,acountrycanhaveanoverallBOPsurplusordeficitasthecentralbankwillaccommodateitviaofficialreservetransactions.

Exhibit3.3indicatesthatin1991,theU.S.hadacurrentaccountdeficitandatthesametimeacapitalaccountdeficit.Explainhowthiscanhappen?

Answer:In1991,theU.S.experiencedanoverallBOPdeficit,whichmusthavebeenaccommodatedby

theFederalReserve’sofficialreserveaction,i.e.,drawingdownitsreserveholdings.

ExplainhoweachofthefollowingtransactionswillbeclassifiedandrecordedinthedebitandcreditoftheU.S.balanceofpayments:

AJapaneseinsurancecompanypurchasesU.S.TreasurybondsandpaysoutofitsbankaccountkeptinNewYorkCity.

AU.S.citizenconsumesamealatarestaurantinParisandpayswithherAmericanExpresscard.

AIndianimmigrantlivinginLosAngelessendsacheckdrawnonhisL.A.bankaccountasagifttohisparentslivinginBombay.

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AU.S.computerprogrammerishiredbyaBritishcompanyforconsultingandgetspaidfromtheU.S.bankaccountmaintainedbytheBritishcompany.

Answer:

Transactions

Credit

Debit

JapanesepurchaseofU.S.TbondsJapanesepaymentusingNYCaccount

U.S.citizenhavingamealinParisPayingthemealwithAmericanExpress

GifttoparentsinBombay

Receiptsofthecheckbyparents(goodwill)

Exportofprogrammingservice

BritishpaymentoutitsaccountinU.S.

ConstructthebalanceofpaymenttableforJapanfortheyearof1998whichiscomparableinformattoExhibit3.1,andinterpretthenumericaldata.YoumayconsultInternationalFinancialStatisticspublishedbyIMForresearchforusefulwebsitesforthedatayourself.

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Answer:

AsummaryoftheJapaneseBalanceofPaymentsfor1998(in$billion)

CurrentAccount

(1)Exports

(1.1)Merchandise

(1.2)Services

(2)Imports

-516.50

(2.1)Merchandise

-251.66

(2.2)Services

-111.83

(3.3)Factorincome

-153.01

(1.3)Factorincome

(3)Unilateraltransfer

Balanceoncurrentaccount[(1)+(2)+(3)]

Credits

646.03

374.04

62.41

209.58

5.53

120.69

Debits

-14.37

CapitalAccount

(4)Directinvestment

3.27

-24.62

(5)Portfolioinvestment

73.70

-113.73

(5.1)Equitysecurities

16.11

-14.00

(5.2)Debtsecurities

57.59

-99.73

(6)Otherinvestment

39.51

-109.35

Balanceonfinancialaccount[(4)+(5)+(6)]

Statisticaldiscrepancies

OverallbalanceOfficialReserveAccount

4.36

6.17

-131.22

-6.17

Source:IMF,InternationalFinancialStatisticsYearbook,1999.

Note:Capitalaccountintheabovetablecorresponds withthe‘Financialaccount’inIMF’s balanceofpaymentstatistics.IMF’sCapitalaccount’isincludedin‘Otherinvestment’intheabovetable.

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MINICASE:MEXICO’SBALANCEOFPAYMENTSPROBLEM

Recently,Mexicoexperiencedlarge-scaletradedeficits,depletionofforeignreserveholdingsmajorcurrencydevaluationinDecember1994,followedbythedecisiontofreelyfloatthepeso.TheventsalsobroughtaboutasevererecessionandhigherunemploymentinMexico.Sincethedevaluathowever,thetradebalancehasimproved.

InvestigatetheMexicanexperiencesindetailandwriteareportonthesubject.Inthereport

may:

documentthetrendinMexico’skeyeconomicindicatorss,uchasthebalanceofpayments,theexchangerate,andforeignreserveholdings,duringtheperiod1994.1through1995.12.;

investigatethecausesofMexico’sbalanceofpaymentsdifficultiedsevparliuoartitoon;thepeso

discusswhatpolicyactionsmighthavepreventedormitigatedthebalanceofpaymentsproblemthesubsequentcollapseofthepeso;and

derivelessonsfromtheMexicanexperiencethatmaybeusefulforotherdevelopingcountries.Inyourreport,youmayidentifyandaddressanyotherrelevantissuesconcerningMexico’sbalancpaymentproblem.

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SuggestedSolutiontoMexico’sBalance-of-PaymentsProblem

Tosolvethiscase,itisusefultoreviewChapter2,especiallythesectionontheMexicanpesocrisis.DespitethefactthatMexicohadexperiencedcontinuoustradedeficitsuntilDecember1994,thecountry’scurrencywasnotallowedtodepreciateforpoliticalreasons.TheMexicangovernmentdidnotwantthepesodevaluationbeforethePresidentialelectionheldin1994.IftheMexicanpesohadbeenallowedtograduallydepreciateagainstthemajorcurrencies,thepesocrisiscouldhavebeenprevented.

The