atswa pilot questions answers part i - The Institute of Chartered ...

A Typical Balance of Payments (BOP) statement is divided into three component
accounts.
(a) State the THREE component accounts of a BOP statement (4½ Marks)
(b)
(c)
State the condition under which the overall BOP of a country will be classified
as deficit.
(2 Marks)
Explain briefly any THREE policy measures relevant in the correction of balance
of payments deficit.
(6 Marks)
(Total 12 ½ Marks)
SOLUTION 4
(a)
(i)
The three component accounts of a Balance of Payments statement are:-
Current Account: This account covers merchandise trade (visible export and
import), services and income as much as unrequited transfers.
(ii) Capital Account: This shows changes in the volume of a country‟s foreign
assets and liabilities through various capital movements and investments.
(iii)
(b)
(c)
Official reserves account: This is also known as Cash account and it shows how
foreign reserves and short-term claims have changed in response to current and
capital transactions. It is the balancing item. (1 1/ 2 Marks each = 4 ½ Marks)
Balance of payments of a country is classified as deficit when the total
payments and transfers to foreign countries exceed total receipts from the
foreign countries.
(2 Marks)
The policy measures which can be employed to correct persistent balance of
payments deficit include:
(i)
Import restrictions: Import volume can be reduced by imposition of tariffs
on non-essential imports while selective quotas or embargo are placed
on the importation of goods that can be produced by the country‟s import
substitution industries. This will help to reduce the import value and
stimulate domestic production.
(ii) Export Promotion: The country suffering from the persistent BOP deficit
should introduce policy measures that would restructure and diversify
the productive base of the economy. These measures will enhance
domestic production and exports promotion; thus increasing the
country‟s export value.
(iii) Currency Devaluation: This is the official reduction in the value of a
country‟s currency relative to foreign currencies. Devaluation of
currency reduces the export prices of the affected country and
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