Answering Balance of Payments Questions (1 Viewer)

[swagmeister]

So does anybody have any tips for answering BOP questions? I find it a bit harder than the other stuff because there are so many monotonous details and all sorts of different aspects to consider for each part of it.

 

[mreditor16]

So does anybody have any tips for answering BOP questions? I find it a bit harder than the other stuff because there are so many monotonous details and all sorts of different aspects to consider for each part of it.

Could you give an example? The numerical type Qs or the wordy type ones? Best to work with a sample Q.

 

[swagmeister]

One thing is how do you know whether the parts are cyclical or structural - why isn't the primary incomes account cyclical, cause factors such as interest and dividend payments are going to depend on the cycle - if the economy is in a growth phase companies will likely be able to offer higher dividends etc... How does this make sense?

Also this question confused me a bit:

 

[Mikes]

One thing is how do you know whether the parts are cyclical or structural - why isn't the primary incomes account cyclical, cause factors such as interest and dividend payments are going to depend on the cycle - if the economy is in a growth phase companies will likely be able to offer higher dividends etc... How does this make sense?

Also this question confused me a bit:
View attachment 31775

Is the answer b? The other options seem to be blatantly wrong.

 

[RivalryofTroll]

One thing is how do you know whether the parts are cyclical or structural - why isn't the primary incomes account cyclical, cause factors such as interest and dividend payments are going to depend on the cycle - if the economy is in a growth phase companies will likely be able to offer higher dividends etc... How does this make sense?

Also this question confused me a bit:
View attachment 31775

The primary incomes account is affected by both STRUCTURAL and CYCLICAL factors, not just cyclical.

Dividends question:
Domestic business cycle (cyclical) affects the performance of business --> if domestic business profits is higher (due to a stronger domestic business cycle) then there'll be higher ''equity servicing costs'' (profits are distributed to shareholders as 'dividends') --> since a good proportion of the Australian public share market is foreign owned, a good proportion of dividends are DEBITS to overseas shareholders --> ultimately, stronger domestic growth and profits worsens the NPI deficit (due to the dividend debits as a result of equity servicing costs).

As for the multiple choice question:
So the relationship between the CA and KFA can be summarised mathematically as --> CA deficit = KFA surplus --> so an increasing KFA balance will lead to a decreasing CA balance (increasing deficit).

So D is wrong --> both accounts can't improve at the same time.
C is wrong --> both accounts can't worsen at the same time (increase in import expenditure would worsen CAD and increasing financial outflows would worsen KFA).
A seems wrong --> an increase in net income outflows shouldn't ''generate'' foreign liabilities (cause debt servicing costs are being paid).

B best describes the relationship.
An increase in financial inflows --> higher servicing costs (overseas investors expect a return) --> increases foreign liabilities --> as a result, increasing the deficit on the net income account.

This satisfies the relationship: CA deficit = KFA surplus

In B --> increased financial inflows increases the KFA surplus (i.e. improves account), while higher servicing costs increases the NPI deficit/CAD (i.e. worsens account).