Tutorial Chapter 7

PEC2143 (JULY 2021) KPTM BANGI
7 Balance
of Payments
Compiled by: haslin hs

BALANCE OF PAYMENT
ITEMS NOTE
Trade export
- Trade import
Balance On Trade/Goods/Merchandise Account A
Transportation
+ Travel
+ Government Transaction
+ Other services
Balance On Services Account B
Balance On Goods And Services C A+B
Compensation Of Employees
+ Investment Income
Balance On Income Account D
+ Current Transfer E
BALANCE ON CURRENT ACCOUNT F C+D+E
+ Capital transfer
+ Acquisition/disposal of non-produced, non-financial assets
Balance On Capital Account G
+ Direct investment
+ Portfolio investment
+ Other investment
Official sector
Private sector
Balance On Financial Account H
BALANCE ON CAPITAL AND FINANCIAL ACCOUNT I G+H
+ Error and omissions J
OVERALL BALANCE F+I+J
Net Changes In Central Bank International Reserves

a. Merchandise / Goods trade Balance

 The difference between export and import of physical goods
 Trade Surplus = export > import
 Trade deficit = export < import
b. Service Balance
 The difference of receipts and payments from services
c. Income Account
 The difference between investment income flows into and out of a country
d. Current Transfer
 Records all transfer payments received and paid abroad by public and private sectors
e. Capital Account
 Records all international capital transfer
 Eg. The acquisition or disposal of a non-financial asset and non-produced assets (eg.
Land)
f. Financial Account
i. Direct Investment
 Long-term Investment
Foreign investors establish new firms and industries in Malaysia
Transfer of existing assets from local firms to foreign firms
(merger & acquisition)
When an industry abroad provides inputs for a firm’s domestic
production process
ii. Portfolio Investment
 Short-term Investment
Purchase of shares, stocks in a foreign company
Purchase of bonds issued by a foreign government
iii. Other Investment
 Includes all transactions in currency and bank deposits by a foreigner in a
local bank to earn a high-interest rate
g. Errors and Omissions

 Also known as a statistical discrepancy
 A balancing item in which the credits and debits must be equal
 It occurs in short term capital flow to record adjustments for unrecorded transactions
h. Official Reserve Account

 Consists of :
1. Government Gold & Foreign Currency Reserve
2. Government Reserves with the International Monetary Fund (IMF)
3. Special Drawing Right (SDR) – in the form of bookkeeping entries that can
be used by countries to settle their international accounts.

MULTIPLE-CHOICE QUESTIONS
1. The balance of payment is

A. a record of the payments made by one company in one country to another company in another
country.
B. the identity that illustrates the balance between exports and imports.
C. a periodic statement of the monetary value of all transactions between residents in one country
and residents of all other countries.
D. any transaction that supplier the domestic country’s currency.
2. The balance of payment contains information regarding

A. purchases of Malaysia’s financial assets by foreigners.
B. purchases of foreign financial assets by Malaysian.
C. levels of Malaysia’s exports and imports.
D. all of the above.
3. The situation when a country exports more than it imports is known as

A. a trade surplus.
B. a budget surplus.
C. an expansion.
D. a term of trade.
4. Which of the following is not included in the current account balance?

A. Balance of goods and services.
B. Financial account.
C. Current transfer.
D. Net income.
5. Which of the following is not a component of the current account?

A. Investment income
B. Net government transfer
C. Portfolio investment
D. Travel expenses
6. Which of the following is NOT considered as a unilateral transfer?

A. Income earned from foreign investments.
B. Personal gifts to friends or family abroad.
C. Institutional charitable donations.
D. Government transfers to foreign residents.

7. Deficit in the balance of payments account can be corrected by

A. lowering domestic prices.
B. raising indirect taxes.
C. increasing government expenditures.
D. lowering the interest rate.
8. A favorable balance of trade occurs when

A. export equal imports.
B. the balance of payments balances.
C. the current and capital accounts are equal.
D. the value of merchandise exports exceeds the value of merchandise imports.
9. Which of the following policies is inappropriate to correct a deficit balance of payments?

A. Encouraging import of capital.
B. Discouraging the import of goods.
C. Appreciation of the currency.
D. Imposition of foreign exchange controls.
10. Which action is not suitable for correcting a deficit in the balance of payments?
A. Discouraging import
B. Imposition of tariff
C. Appreciation of currency
D. Exchange controls
11. The balance of payment contains information regarding

A. purchases of Malaysia’s financial assets by foreigners.
B. purchases of foreign financial assets by Malaysian.
C. levels of Malaysia’s exports and imports.
D. all of the above.
12. Given the following information, calculate the value of the overall balance.
Balance of current account RM 54 000 million
Balance on capital account RM 60 000 million
Errors and omission RM 7 800 million
A. RM 106 200 million

B. RM 1800 million
C. RM 114 000 million
D. RM 121 800 million

13. Which of the following is not included in the current account balance?
A. Balance of goods and services.
B. Financial account.
C. Current transfer.
D. Net income
14. Which of the following is NOT considered as a unilateral transfer?

A. Income earned from foreign investments.
B. Personal gifts to friends or family abroad.
C. Institutional charitable donations.
D. Government transfers to foreign residents.
15. A deficit in the balance of payments account can be corrected by

A. lowering domestic prices.
B. raising indirect taxes.
C. increasing government expenditures.
D. lowering the interest rate.
16. A favorable balance of trade occurs when

A. export equal imports.
B. the balance of payments balances.
C. the current and capital accounts are equal.
D. the value of merchandise exports exceeds the value of merchandise imports.
17. Which action is not suitable for correcting a deficit in the balance of payments?
A. Discouraging import
B. Imposition of tariff
C. Appreciation of currency
D. Exchange controls
18. Which of the following policies is inappropriate to correct a deficit balance of payments?
A. Encouraging import of capital.
B. Discouraging the import of goods.
C. Appreciation of the currency.
D. Imposition of foreign exchange controls.


STRUCTURED QUESTIONS
QUESTION 1
The following data represents the Balance of Payment of a country in 2008
ITEMS RM
Merchandise exports 4000
Merchandise imports 3500
Government transactions 1850
Giving Service to foreign ship 1800
Travel 1250
Investment income 2500
Remittance of Indonesian workers to Indonesia 2400
Portfolio investment 2600
Direct investments 2200
Other investments 1500
Errors and omissions 1000
Calculate:
a. Merchandise trade balance. (2 points)
b. Services balance. (2 points)
c. Balance on goods and services. (2 points)
d. Overall balance (2 points)
e. Net change in the country’s international reserves (2 points)


QUESTION 2
Table 4 shows the balance of payments for Malaysia in 2011.
Table 4
Item RM (billion)
Exports of goods 575
Imports of goods 450
Transportation 150
Net Transfer 35
Errors and Omissions 15
Foreign assets in Malaysia 299
Malaysia’s assets abroad 166
Other Services -75
Travel 50
Investment Income 13
Government Transactions -40
Calculate:
a. Merchandise account balance and the service account balance. (4 points)
b. Current account balance (2 points)
c. Balance on financial and capital account (2 points)
d. Overall balance (2 points)
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QUESTION 3
The following data shows the Balance of Payment for Malaysia in 2010.
Items RM (million)
Exports 2,100
Other investment 700
Education 1,820
Imports 1,470
Income from investment 6,160
Government transaction 2,870
Insurance 1,050
Direct investment 3,500
Other services 3,220
Errors and omissions 6,300
Capital account 5,950
Current transfers 2,030
Portfolio investment 3,640
Transportation 6,580
Calculate:
a) Merchandise trade balance. (1 point)
b) Current account balance. (5 points)
c) Capital and financial account balance. (2 points)
d) Overall balance. (2 points)
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QUESTION 4
The following data represents the Balance of Payment of a country in 2008
Items RM Millions
Exports 365, 223
Imports 290, 894
Freight & Insurance -12, 202
Other transportations 2, 441
Travel 8, 999
Government transactions -57
Other services -11, 309
Investment income -24, 978
Compensation of employee -15, 264
Transfer payments -7, 468
Direct investment 2, 418
Portfolio investment 4, 265
Other investment -21, 323
Errors and omissions -6, 960
a) Calculate:
i. Balance on goods and services. (2 points)
ii. Balance on current account. (2 points)
iii. Overall balance. (2 points)
iv. Net changes in the official reserve assets. (1 point)
b) Is the above country facing a surplus or deficit Balance of Payment? (1 point)
c) List two (2) effects of the above balance of payment to the position on the country. (2 points)
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QUESTION 5
The following table shows the Balance of Payments for Malaysia in 1998.
Table 4
Items RM Million
Exports 319,568
Imports 233,519
Transportation -8,464
Nett transfer -6,567
Errors and omissions -4,924
Official long term capital 9,397
Direct investment -36,854
Other services -8,395
Travel 6,135
Investment income -20,275
Government transactions 23
Calculate:
a. The trade balance (2 points)
b. Service account balance (2 points)
c. Current account balance (2 points)
d. Capital and Financial account balance (2 points)
e. Overall Balance (2 points)
(Total : 10 Marks)
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a
QUESTION
. 6
Table 4 shows the balance of payments for Malaysia in year 2019.
Table 4
Item RM (million)
s
Export 250,245
Import 237,500
Freight and insurance - 9,728
Net transfer 3,185
Error and omissions 4,613
Official long-term capital 11,643
Corporate investment 12,240
Net private capital - 31,798
Other transportation 1,987
Travel 5,276
Investment income 16 135
Government transaction - 84
Other services - 805
Based on the above data, calculate:
i. Balance on merchandise account (2 points)
ii. Balance on service account (2 points)
iii. Current account balance (2 points)
iv. Balance on capital and financial account (2 points)
v. Overall balance (2 points)
(Total: 10 points)
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SHORT ESSAY QUESTIONS
1. Distinguish between trade deficit and trade surplus (4 points)
2. Explain disequilibrium in balance of payment. (2 points)
3. List four (4) measures to solve / correct the problem of deficit in the (4 points)
balance of payments.
Explain TWO (2) effects of deficit in the Balance of Payments of a
4. (4 points)
country.
20

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PEC2143 (JULY 2021) KPTM BANGI

Compiled by: haslin hs

Balance On Goods And Services C A+B

BALANCE ON CURRENT ACCOUNT F C+D+E

BALANCE ON CAPITAL AND FINANCIAL ACCOUNT I G+H

+ Error and omissions J

OVERALL BALANCE F+I+J

Net Changes In Central Bank International Reserves

Compiled by: haslin hs

a. Merchandise / Goods trade Balance

g. Errors and Omissions

h. Official Reserve Account

Compiled by: haslin hs

1. The balance of payment is

2. The balance of payment contains information regarding

3. The situation when a country exports more than it imports is known as

4. Which of the following is not included in the current account balance?

5. Which of the following is not a component of the current account?

6. Which of the following is NOT considered as a unilateral transfer?

Compiled by: haslin hs

7. Deficit in the balance of payments account can be corrected by

8. A favorable balance of trade occurs when

9. Which of the following policies is inappropriate to correct a deficit balance of payments?

11. The balance of payment contains information regarding

A. RM 106 200 million

Compiled by: haslin hs

14. Which of the following is NOT considered as a unilateral transfer?

15. A deficit in the balance of payments account can be corrected by

16. A favorable balance of trade occurs when

Compiled by: haslin hs

Compiled by: haslin hs

The following data represents the Balance of Payment of a country in 2008

Merchandise exports 4000

Merchandise imports 3500

Government transactions 1850

Giving Service to foreign ship 1800

Investment income 2500

Remittance of Indonesian workers to Indonesia 2400

Portfolio investment 2600

Direct investments 2200

Other investments 1500

Errors and omissions 1000

a. Merchandise trade balance. (2 points)

b. Services balance. (2 points)

c. Balance on goods and services. (2 points)

d. Overall balance (2 points)

e. Net change in the country’s international reserves (2 points)

Compiled by: haslin hs

Compiled by: haslin hs

Table 4 shows the balance of payments for Malaysia in 2011.

Exports of goods 575

Imports of goods 450

Errors and Omissions 15

Foreign assets in Malaysia 299

Malaysia’s assets abroad 166

Other Services -75

Government Transactions -40

a. Merchandise account balance and the service account balance. (4 points)

b. Current account balance (2 points)

c. Balance on financial and capital account (2 points)

d. Overall balance (2 points)

Compiled by: haslin hs