International finance – practical sessions
Lecturer: dr. Vasja Rant
2. Analysis of the balance of payments and the international investment position
A – SELF-ASSESSMENT QUESTIONS
1. What are autonomous and compensatory transactions in the balance of payments?
2. Explain the following sub-balances of the balance of payments and their analytical
a. Trade balance
b. Current account balance
c. Basic balance
d. Overall balance
3. When is the balance of payments considered sustainable?
a. In the long run
b. In the medium run
c. In the short run
4. Which factors affect sustainability of a current account deficit?
5. When is it reasonable to consider financing vs. structural adjustment of a current account
6. When do we consider a country to be in the following positions vis-a-vis the rest of the
a. Net borrower from ROW
b. Net lender to ROW
c. Net capital importer from ROW
d. Net capital exporter to ROW
7. What is the link between the balance of payments and the national accounts?
8. What is the basic difference in concepts between the balance of payments and the
international investment position?
B - EXERCISES
9. Uporabite spodnje podatke o tekočem računu plačilne bilance Avstralije in odgovorite na
Australia - current account, 1998 1999 2000 2001 2002 2003
Goods: exports 55.884 56.096 64.052 63.676 65.099 70.577
Goods: imports 61.215 65.857 68.865 61.890 70.530 ?
Services: credit 16.181 17.399 18.677 16.689 17.906 21.205
Services: debet 17.272 18.330 18.388 16.948 18.107 21.638
Income: credit 6.532 7.394 8.984 8.063 8.194 9.457
Income: debet 17.842 18.968 19.516 18.332 19.884 24.245
Current transfers: credit 2.651 3.003 2.622 2.242 2.310 2.767
Current transfers: debet 2.933 3.032 2.669 2.221 2.851 ?
a. Calculate the trade balance in 1998-2000 b. Calculate the balance of services in 1998-2000? c. Calculate the current account balance in 1998-2000? d. Was Australia a net recepient or a net contributor of unilateral transfers in 2003?
e. What was the amount of unilateral transfers that Austalian residents appropriated
to foreigners in 2002, if outflows of unilateral transfers exceeded inflows by $ 63
f. Which item in the table indicates that Australian residents have been paying
income to non-residents for supplied labor and capital in 2003 and 2004.
g. How much was the import of goods in 2002 if the current account balance
amounts to $ -30.674 milliona in the same year?
10. You obtain the following data about Korean balance of payments from the IMF's
International Financial Statistics online.
Balance of Payments – South Korea 1998 1999
40.371 24.522 Current Account, n.i.e.
132.251 145.375 Goods: Exports f.o.b.
-90.586 -116.912 Goods: Imports f.o.b.
41.665 28.463 Trade Balance
25.565 26.529 Services: Credit
-24.541 -27.180 Services: Debit
42.689 27.812 Balance on Goods & Services
2.675 3.245 Income: Credit
-8.313 -8.404 Income: Debit
37.051 22.653 Balance on Gds, Serv. & Inc.
6.737 6.421 Current Transfers, n.i.e.: Credit
-3.416 -4.552 Current Transfers: Debit
171 -389 Capital Account, n.i.e.
464 95 Capital Account, n.i.e.: Credit
-293 -484 Capital Account: Debit
-8.381 12.709 Financial Account, n.i.e.
-4.740 -4.198 Direct Investment Abroad
5.412 9.333 Dir. Invest. in Rep. Econ., n.i.e.
-1.999 1.282 Portfolio Investment Assets
42 -271 Equity Securities
-2.041 1.553 Debt Securities
775 7.908 Portfolio Investment Liab., n.i.e.
3.856 12.072 Equity Securities
-3.081 -4.164 Debt Securities
412 401 Financial Derivatives Assets
-1.066 -915 Financial Derivatives Liabilities
6.693 -2.606 Other Investment Assets
6.970 -203 Banks
-36 -164 Monetary Authorities
-46 -169 General Government
-194 -2.071 Other Sectors
-13.868 1.502 Other Investment Liab., n.i.e.
-6.233 1.418 Banks
25 148 Monetary Authorities
4.628 3.309 General Government
-12.288 -3.372 Other Sectors
-6.231 -3.581 Net Errors and Omissions
25.930 33.260 Overall Balance
-25.930 -33.260 Reserves and Related Items
-30.968 -22.990 Reserve Assets
5.038 -10.271 Use of Fund Credit and Loans
Answer the following questions based on the above data.
a. What was the amount of income earned by Korean residents from ownership
stakes in foreign companies and working abroad in 1999?
b. Were Korean residents net recepients or net contributors of current transfers in
1998 an 1999?
c. What was the amount of Korea's savings-invesment gap in 1998 and 1999? Does
the figure indicate a surpluss or a deficit of savings?
d. What could be a potential reason for the value +464 for the item capital account:
credit in 1998, if you take into account that the country was hit by the Asian
financial crisis in 1997?
e. What can you deduce from the change in the sign of the item ?Portfolio
Investment Assets?, which turned from negative in 1998 (-1.999) to positive in
f. Which BoP items indicate that Korean residents might have been forced to
withdraw investments in banks abroad in 1998 in order to cover for the lack of
bank financing from the rest of the world?
g. Was Korea a net importer or exporter of capital in case of portfolio equity
investments in 1998 and 1999? Support your argument with a figure! h. Were Korean residents predominantly buying or selling foreign debt securities in
1998? What about in 1999? By what amount did the value of sales exceed the
value of purchases (and vice versa)?
i. How is it possible that both the current account balance and the capital-financial
account balance (the latter is obtained by summing capital account balance and
financial account balance) of Korea have a positive sign in 1999? Explain the
observed imbalance between the current and capital-financial transactions and its
implications for balancing of Korea's balance of payments as a whole in 1999! j. Which item in the table indicates that Korea had problems with balancing its
balance of payments in 1998? How would you interpret the change of sign of this
same item in 1999?
11. Use the following table about the balance of payments of the PR China to answer the
Millions USD 1998 1999 2000 2001 2002 2003
A. Current account balance 31.472 21.115 20.518 35.422 45.875 ?
B. Capital account balance -47 -26 -35 -54 -50 -48
C. Financial account balance -6.275 5.204 1.958 34.832 52.774 ?
D. Net errors and omissions -18.902 -17.641 -11.748 -4.732 7.504 ?
E. Reserves and related items -47.447 -75.217 -116.586 ? ? ?
a. Calculate reserves and related items in 1998-2000
b. Calculate the current account balance in 2001
c. Calculate the financial account balance in 2002
d. Calculate net errors and ommissions in 2003. Does the rising trend of this item
from previous years indicate anything?
e. In which years is China net importer and in which years net exporter of capital
(support your arguments with figures!)
f. Calculate the overall balance in individual years
g. What kind of pressure on the value of the chinese yuan would you expect based on
the data under category E., ?Reserves and related items?? Remember, Chinese
exchange rate is fixed!
h. Has China increased its international monetary reserves in any of the years shown
in the table?
12. The table below shows the international investment position of Slovenia in 2006. Answer
the following questions based on the data contained in the table.
International investment position – Slovenia 2006
Millions of USD
Direct investment abroad 4.553
Portfolio investment 6.760
Equity securities 2.977
Debt securities 3.783
Financial derivatives 35
Other investment 14.618
Monetary authorities 231
General government 229
Other sectors 10.315
Reserve assets 7.136
Direct investment in Rep. Econ. 8.923
Portfolio investment 4.132
Equity securities 866
Debt securities 3.266
Financial derivatives 0
Other investment 26.913
Monetary authorities 21
General government 330
Other sectors 12.488
a. The figure under the item ?portfolio investment assets? in the international
investment position of Slovenia in 2006 is 6.760 millions USD, while the figure
under the same item in Slovenia's balance of payments for the same year is -2.677
millions USD. What is the interpretation of both figures? Are they related? b. What was the amount of international monetary reserves held by Slovenia at the
end of 2006?
c. Was Slovenia a net lender to or a net borrower from the rest of the world at the end
of 2006? Which type of financial investments mostly contributed to Slovenia's
d. Did Slovenia record net assets or net liabilities vis-a-vis the rest of the world in the
area ob bank investments? How can this situation impact transmission of impulses
from international financial environment to Slovenia (i.e. the global financial