Explain the following: A) What is the balance of payments and what are the components? What...

Explain the following:

A) What is the balance of payments and what are the components? What are

the credit items in the balance of payments? Explain.

B) What are different types of exchange rate systems in the economy? What

happens to the value of money if interest rate on short term bonds increase in other countries assuming that it stays the same in Canada? Explain.

Solutions

Expert Solution

A - The balance of payment is the account of the receipt and payment which is made by the government. It is the record of all the transactions that take place with other economies . It is a T shaped account.

BOP has mainly two components which are

1 - Current account - This includes the import , export of goods and services and unilateral transfer.

2 - Capital accounts - This records the investments , borrowings etc.

The inflow is recorded on credit side and outflow on debit side.

Items such as export , receipt of foreign aid , receipt of interest on investment , borrowings done etc are the items which involve the inflow of money in economy. Hence these items are recorded on the credit side of BOP.

Rahul Sunny answered 2 years ago

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