Larry Goren, CFA, is an economist for the Federal Reserve Bank. He is interested in using a country’s balance of payments as a forecasting tool in determining exchange rates. He notices that China has a high current account balance resulting in a large surplus in its balance payments. It can be implied that: A) China received a great deal of income flows from the sale of trade merchandise and services and payments on its existing investments. B) China provided a great deal of financial assistance to other nations. C) China’s international currency reserve holdings have increased. Your answer: A was correct! A large increase in China’s current account can only mean that it has received income from the sale of its trade merchandise (exports) and payments on its existing investments. Both remaining transactions affect the other elements of the balance of payment accounts. If China lends financial assistance to other nations, it shows up in its capital account and if its foreign currency reserves increase, it shows up in its official reserve account. ----- I have an issue with the phrase, “If China lends financial assistance to other nations, it shows up in its capital accountIf China lends financial assistance to other nations, it shows up in its capital account.” Don’t gifts show up in the currenct account and cause a deficit there?
they get you with financially assist which would be an outflow in the capital account, if it was truely a “gift” then your correct to assume in would be an inflow into the current account
If it were a gift, it should be an outflow in the current account, not an inflow. You’re saying that financial assistance is not the same thing as a gift?
Financial assistance of a long term nature i.e. where repayment is more than a year would be capital account , wouldn’t it? Current a/c would only iclude items that settle within the year
right current account would be a year, I believe financial assistance means eithering importing goods to help trade OR investing directly in the country via foreign assets which would be in the capital account
FA = Foreign Investments in Country X - Investment from X Abroad, so IF China was the case, the investments from China abroad would show up in other countries FA as an inflow!
So to summarize: a) If China gives a gift (unilateral transfer), it causes a current account deficit in China and a currency account surplus in Country B. b) If China provides financial assistance (this assumes there will be repayment made) for OVER ONE YEAR term, it causes a CAPITAL account deficit in China and a CAPITAL account surplus in Country B. c) If China provides financial assistance (this assumes there will be repayment made) for UNDER ONE YEAR term, it causes a CURRENT account deficit in China and a CURRENT account surplus in Country B. Is all that accurate?
Looks right to me ^
thansk northeastern…the one year rule is new to me…i assume it was in cfai text because it wasnt in schweser.
i looked this up in cfai econ section and couldnt find mention of the issue about less than a year financial assistance of more than a year being capital account and less than a year being current account. is this correct? where can i find this?
reading 19 (no specific pg number since i made note cards) if its a current transaction (settlement within a year) its in current account
is this for all transacations are for the financial assistance ones only?
can anyone help with this? is it for all transactions or just the financial assistance transactions where you classify more than one year as capital account and less than one year as current accoount? thanks.