Balance Of Payment Example

Balance of Payment

Question 1

Balance of payment is a measure that determines the flow of payments between two countries, the balance of payment is determined by the level of exports and imports, financial capital and financial transfers. The balance of payment gives us an identity which states that when we add up the capital account plus the current account plus the financial account this will be equal to the changes in the reserves account of the country.

The following is a description of the accounts:

The capital account;

The capital account records the transfer payments that are related to capital items such as fixed assets which can be referred to as capital goods.

The financial account;

This account records the changes in the ownership of financial assets. This account records the changes in ownership in assets in a country and even in the foreign country. Because it records net changes then the value of the financial account will be equal to the increase in foreign

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ownership of the domestic assets minus the increase in domestic ownership of the foreign assets.

The Current account;

This account records the flow of goods and services in a country, it records the trade in both goods and services and at the same time income from investments and also money transfers.

Recording the following transactions:

1. Buying California wine by a French importer- record in the current account

2. Depositing of a cheque by an American worker who works for a French company and the

cheque is drawn from a bank in               Paris- current account

3. American buys bonds from a Japanese company- financial account

4. American charity sends money to Africa- current account

The effect on the balance of payment can be summarised below:

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Balance of Payment

account

effect on balance of payment

wine

current account

positive

salary check

current account

positive

bonds

financial account

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Balance of Payment

negative

charity

current account

negative

Financial account:

Current account:

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Question 3

2. GDP measurement:

The GDP level is measured in three methods namely:

Income approach;

This method of GDP measurement adds up all the factor incomes that are earned by all the factors of productions earned in the production process to measure GDP.

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Expenditure approach:

This is another method of measuring GDP. GDP is measured by adding up all the expenditures on final goods produced in the economy.

Product approach:

The measurement of GDP is done by adding up the value added up on the goods and services.

This method measures the flow of goods and services in the economy.

1. GDP on value added

We add up the value that is added up in the production process, the value will be calculated using the difference between the initial cost of the product and the final value

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gdp

bread

cheese

pizza

value added

35

15

40

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90

1. GDP on spending on final goods

We add up the expenditures on all the final goods in the economy, the expenditure level is calculated by adding up the spending on the final goods

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bread

cheese

pizza

GDP

expenditure

160

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1. GDP on final income

The GDP level in income is calculated by adding up the income by factors of income, this is calculated by adding up the value that is paid to labour

bread

cheese

pizza

factor income

15

20

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75

110

The GDP level can be summarised by the graph below:

GDP

value added

90

factor income

110

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expenditure

160

References;

Brian Snow (1997) Macroeconomics: introduction to macroeconomics, Rout ledge publishers, U K

Philip Hardwick (2004) Introduction to Modern Economics, Pearson Education Press, UK

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