UNIVERSITY OF GUYANA
FACLTY OF SOCIAL SCIENCES
ACADEMIC YEAR 2019/2020 (Semester II)
DEPARTMENT OF ECONOMICS
ECN 1200- INTRODUCTION TO MICROECONOMICS
Week Seven Exercise
Question 1
What does balance of payments account show? Name the parts of the balance of payments
accounts.
The balance of payments account shows the inflows and outflows of foreign exchange. However,
in the Macroeconomics we understand that there are three components of the BoP :
1. Current Account
2. Capital Account
3. Official Reserve
Question 2
State the components of capital account of balance of payments.
Capital inflow
Capital outflow
Borrowing and lending to and from abroad
Investment to and from abroad
Debt Amortization
Foreign Direct Investment
Portfolio Investment
Grants from IMF
Question 3
State the components of current account of balance of payments.
Transfers which are one sided transactions: Net Investment Income , Net remittances
Visible/Merchandise Trade ( Exports and Imports of Goods)
Invisible Trade (Exports and Imports of services)
Debt Service Payments
Gift
Question 4
Define the term balance of Trade
Balance of trade is the difference between exports and imports of goods and services over a one
year period.
Question 5
What are the sources of supply of foreign exchange?
Ans. Supply of foreign exchange comes from:
Purchases of goods and services by foreigners (Exports)
Foreign Direct Investment into our country
Question 6
Giving two examples explain the relation between the rise in price of a foreign currency and its
demand.
If the US dollar increases in value (Appreciation) this means that the Guyana dollar has
depreciated. Imports from the US becomes very expensive and this will lead to a fall in the
demand for imports. Hence, the demand for the US dollar will decrease.
Question 7
When price of a foreign currency rises, its demand falls. Explain why.
Assuming that US and Guyana are trading partners. If the US dollar increases in values (for
example the price of US $1 is now $300 Gyd instead of $200), this means that the US dollar has
appreciated against the Guyana dollar. Guyana will see a fall in the demand for US goods.
Hence, the demand for US currency to pay for these imports will also fall.
Question 8
When price of foreign currency rises, its supply also rises. Explain why.
If the US dollar has increased in value this means the Guyana dollar will depreciated. AS a result
of this exports are now cheaper for the US therefore there will be an increase in demand for our
(Guyana) exports. Increase in exports means increase foreign currency (increase in supply of
foreign exchange)
Question 9
The information below are the transactions between Guyana and the rest of the world(1987)
Components US$ Billion
Private Foreign Direct Investment 4
Invisible imports -30
Debt. Amortization -12
Merchandise exports 70
Cash Grant from IMF 2
Financial Portfolio Investment Inflow 4
Invisible exports 20
Merchandise imports -90
Loans from World Bank 16
Capital outflow -20
Net investment income -2
Debt services payments -20
Net remittances -4
Balance of Payments for Guyana 1987 in US $Billion
$ $
CURRENT ACCOUNT
Invisible imports -30
Invisible exports 20
Merchandise exports 70
Merchandise imports -90
Balance of Trade -30
Net investment income -2
Net remittances -4
Debt Service Payments -20
Current Account Balance (deficit) -56
CAPITAL ACCOUNT
Loans from World bank 16
Debt. Amortization -12
Capital Outflow -20
Private Foreign Direct Investment 4
Cash grant from IMF 2
Financial Portfolio Investment Inflow 4
Capital Account Balance -6
Overall balance (Deficit) -62
Official Reserves
Reserves 62
0
(a) Define the term balance of payments?
Balance of payments is a record which shows the summary of transactions between a
country and the rest of the world over a period of one year.
(b) Compute the balance of trade
-30
(c) What is the balance on the current account? -56
(d) What is the balance on the capital account? -6
(e) By how much do the official reserves have to change? Since the overall balance on
the balance of payments is a deficit (negative overall balance) therefore we would
have to draw down on our reserves (reserves will reduce) by an amount exactly equal
to the overall balance. Hence, official reserves will reduce by $62 Billion
If the amount of official reserves at Central Bank is US$55 billion, how does the government
address this issue?
1. Approach an International Financial institution such as the IMF, World Bank etc.
Question 10
This question requires you to state whether the following transactions would be recorded in the Capital
or Current Account and what type of transaction it is debit(-) or credit(+)
1. Purchases of cars and computers from Germany - Current Account – Debit
2. Grant given to Venezuela, by the Government of Guyana. Capital Account – Debit
Use the data below to answer the following questions.
(a) Post the transactions into their respective accounts?
(b) What is the balance of Merchandise trade?
(d) What is the balance on the capital account?
(e) What is the balance on the current account?
(f) By how much will the official monetary reserves of the central bank change?
Merchandise exports + $20,950
Merchandise imports - $21,758
Loans from World Bank + $ 5,678
Invisible imports - $ 3,516
Net transfers + $ 3,278
Capital outflow - $ 4,974
Invisible exports + $ 5,371
Capital inflow + $ 5,612
Debt – service payments - $ 1,015
Grant from IDB + $ 4,330
END