【正文】 ________________________Food 1,530 0 1,530Textiles 100 180 280__________________________________________________________________________IV. Consumption (lbs or yards) (000,000)_____________________ ________________________________Food 1,200 330 1,530Textiles 210 70 280__________________________________________________________________________IM10CHAPTER 3 BALANCE OF PAYMENTSSUGGESTED ANSWERS AND SOLUTIONS TO ENDOFCHAPTERQUESTIONS AND PROBLEMSQUESTIONS 1. Define the balance of payments.Answer: The balance of payments (BOP) can be defined as the statistical record of a country’s international transactions over a certain period of time presented in the form of doubleentry bookkeeping.2. Why would it be useful to examine a country’s balance of payments data?Answer: It would be useful to examine a country’s BOP for at least two reasons. First, BOP provides detailed information about the supply and demand of the country’s currency. Second, BOP data can be used to evaluate the performance of the country in international economic petition. For example, if a country is experiencing perennial BOP deficits, it may signal that the country’s industries lack petitiveness.3. The United States has experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous . current account deficits?Answer: The current account deficits of . may have reflected a few reasons such as (I) a historically high real interest rate in the ., which is due to ballooning federal budget deficits, that kept the dollar strong, and (ii) weak petitiveness of the . industries.4. In contrast to the ., Japan has realized continuous current account surpluses. What could be the main causes for these surpluses? Is it desirable to have continuous current account surpluses?Answer: Japan’s continuous current account surpluses may have reflected a weak yen and high petitiveness of Japanese industries. Massive capital exports by Japan prevented yen from appreciating more than it did. At the same time, foreigners’ exports to Japan were hampered by closed nature of IM11Japanese markets. Continuous current account surpluses disrupt free trade by promoting protectionist sentiment in the deficit country. It is not desirable especially when it is brought about by the mercantilist policies.5. Comment on the following statement: “Since the . imports more than it exports, it is necessary for the . to import capital from foreign countries to finance its current account deficits.”Answer: The statement presupposes that the . current account deficit causes its capital account surplus. In reality, the causality may be running in the opposite direction: . capital account surplus may cause the country’s current account deficit. Suppose foreigners find the . a great place to invest and send their capital to the ., resulting in . capital account surplus. This capital inflow will strengthen the dollar, hurting the . export and encouraging imports from foreign countries, causing current account deficits. 6. Explain how a country can run an overall balance of payments deficit or surplus.Answer: A country can run an overall BOP deficit or surplus by engaging in the official reserve transactions. For example, an overall BOP deficit can be supported by drawing down the central bank’s reserve holdings. Likewise, an overall BOP surplus can be absorbed by adding to the central bank’s reserve holdings.7. Explain official reserve assets and its major ponents.Answer: Official reserve assets are those financial assets that can be used as international means of payments. Currently, official reserve assets prise: (I) gold, (ii) foreign exchanges, (iii) special drawing rights (SDRs), and (iv) reserve positions with the IMF. Foreign exchanges are by far the most important official reserves.8. Explain how to pute the overall balance and discuss its significance.Answer: The overall BOP is determined by puting the cumulative balance of payments including the current account, capital account, and the statistical discrepancies. The overall BOP is significant because it indicates a country’s international payment gap that must be financed by the government’s official reserve transactions.IM129. Since the early 1980s, foreign portfolio investors have purchased a significant portion of . treasury bond issues. Discuss the shortterm and longterm effects of foreigners’ portfolio investment on the . balance of payments.Answer: As foreigners purchase . Treasury bonds, . BOP will improve in the short run. But in the long run, . BOP may deteriorate because the . should pay interests and principals to foreigners. If foreign funds are used productively and contributes to the petitiveness of . industries, however, . BOP may improve in the long run.10. Describe the balance of payments identity and discuss its implications under the fixed and flexible exchange rate regimes.Answer: The balance of payments identity holds that the bined balance on the current and capital accounts should be equal in size, but opposite in sign, to the change in the official reserves: BCA + BKA = BRA. Under the pure flexible exchange rate regime, central banks do not engage in official reserve transactions. Thus, the overall balance must balance, ., BCA = BKA. Under the fixed exchange rate regime, however, a country can have an overall BOP surplus or deficit as the central bank will acmodate it via official reserve transactions.11. Exhibit indicates that in 1991, the . had a current account deficit and at the same time a capital account deficit. Explain how this can happen?Answer: In 1991, the . experienced an overall BOP deficit, which must have been acmodated by