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International Finance


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Balance of payment (BOP) refers to the method of analyzing theperformance of countries in relation to the monetary transactionsthat have been conducted within a given period of time (Friedman &ampRoosa, 1967). In most instances, the balance of payment values iscalculated quarterly or annually depending on the specific needs ofthe regulatory authorities (Fonds monétaire international, 1996).The economic variable caters for both public and private transactionsthat have been conducted within the specific periods underinvestigation. This is aimed at determining the amount that is movinginto and out of the country (Friedman &amp Roosa, 1967).

Any amount received by the country is considered as a credit whereasthe amount paid out by the nation is known counted as a debit (Fondsmonétaire international, 1996). In utopia, the balance of paymentshould be zero since it is assumed that assets (credits) should beequal to the liabilities (debits). However, this is a scenario thatis very rare due to the existence of various externalities that arisein the economy over time. From the balance of payment details, one isin a position to determine whether a country has a deficit or surplusand the particular part of the economy that is responsible for theeconomic outcome.

Question 1

The balance of payment is divided into three main categoriesincluding the current account, the capital account, and the financialaccount. Each of the three accounts caters for various types offinancial transactions. The current account is utilized to record theflow of goods into and out of the country. Additionally, all forms ofearnings on investments from both the private and public sectors arealso included in the current account. This type of balance of paymentaccount includes credits and debits on the trade of merchandise. Acountry with a trade deficit in the balance of payment is anindication that the imports are more than the exports. On the otherhand, a balance of trade surplus indicates that there are moreexports than the imports.

The capital accounts of the balance of payment contain internationalcapital transfers made by a country in a given period (Friedman &ampRoosa, 1967). It includes acquisitions as well as the disposal of nonfinancial assets such as land and non-produced asset. The latterrefers to resources that are essential to the production process butare yet to be produced. An example of a non-produced asset is a mineto be used for the extraction of diamond. The capital account isfurther divided into a series of monetary flows such as the transferof ownership of fixed assets and death levies.

The final account is known as the financial account (Friedman &ampRoosa, 1967). It incorporates international monetary flows that areassociated with the investment in real estate, businesses, bonds, andstock (International Monetary Fund, 2009). The financial accounts ofthe balance of payments also include additional details such as thegovernment owned assets that include special drawings right (SDRs),gold, and foreign reserves that are held by the InternationalMonetary Fund (IMF). Additionally, the private assets held abroad anddirect foreign investments (FDI) are also included in the financialaccounts of the balance of payment. Other inclusions are assets ownedby foreigners in their private and official capacities.

According to the International Monetary Fund (IMF) database, the dataon the balance of payment for Belgium has been is based on annualreporting (International Monetary Fund, 2009). The study will focuson the economic variables for the last eight years starting in 2008.Average data for each of the years are to be taken intoconsideration. In 2008, Belgium had a current account balance of-4,285.5. The subsequent years recorded the following outcomes:-5,241.2, 7,977.3, -5,486.7, -234.7, -1,575.2,-3,607.3, and 1,934.9 for 2009, 2010, 2011, 2012, 2013, 2014 and 2015respectively. On the other hand, the capital account for Belgiumrecorded -2,738.1, -910.1, -1,142.0, -572.0, 3,019.1, -537.1, and-1,380.5 for 2008, 2009, 2010, 2011, 2012, 2013 and 2014respectively. In 2015, the capital account balance was the nation wasestablished to have averaged 125.2. Finally, the financial accounthas also experienced various fluctuations for the last eight years.In 2008, the financial account of the balance of payment recorded wasrecorded at -9,652.4. Subsequent readings were -17,590.6 (2009),6,567.2 (2010), -9,334.4 (2011), 2,319.3 (2012), -142.5 (2013),-4,455.3 (2014), and 3,016.4 (2015).

Question 2

The shifts in the current account were causedby alterations to the net exports of goods under merchanting, changesin the maintenance and repair services and primary incomes amongothers (Karmakar, 2010). The movementsin the capital accounts can be attributed to the increase or decreasein the Gross disposals of non-produced,nonfinancial assets, credit, Capital transfers, credit, Debtforgiveness, and other capital transfers (InternationalMonetary Fund, 2009). Finally, the shifts inthe financial accounts were as a result of changes of variousvariables such as Direct investment, Net incurrence of liabilities,Direct investment enterprises in direct investor (reverseinvestment), Net acquisition of financial assets, Equity andinvestment fund shares, and Financial derivatives (other thanreserves) and employee stock options (International MonetaryFund, 2009). Others include Net acquisition offinancial assets and Special drawing rights (allocations).

Question 3

Based on the data obtained from Belgium’scurrent account and financing account, the following graph has beenplotted:

It shows the relationship between the two accounts of the balance ofpayment. There seems to be a linear association between the twoaccounts. This has been highlighted by the positive relationshipbetween the two accounts. An increase in one leads to a subsequentincrease in another. The country had the highest deficit balances inthe two accounts in 2008. Similarly, 2010 recorded the highestsurplus balances for the two accounts. However, since the thirdquarter of the 2015 financial year, there has been a noted decline inboth the current and financial accounts.

Question 4

Each country has an official reserve account as part of the financialaccount (International Monetary Fund, 1977). It entails the foreigncurrency held the respective central banks and as such is utilized tofacilitate the payment of balance-of-payment deficits. The officialreserves rises in cases where there is a trade surplus and declineswhen BOP deficits are recorded. The government may also use it tointervene in the foreign exchange market by setting the exchange rateto meet its objective (International Monetary Fund, 1977).

Question 5

From the graph on the Belgium’s Gross Domestic Product (GDP) annualgrowth rate, the country had the lowest growth rate in 2009 (-4%)before ultimately reaching the peak between 2010 and 2011 (3.8%). Thedecline was again evident in 2013 (-1.2%) before rising in 2014 and2015. On the other hand, the country’s balance of payment was9,869, 341,586 in 2009 (4.83%) rise before declining in 2010.However, 2011 saw the largest change percentage in the country’sBOP by 10.62%. Surplus in the balance of payment therefore leads toan increase in the growth rate (GDP).

Question 6

According to the World Bank, the purchasing power parity conversionfactor refers to the amount of units of another currency that arerequired to purchase the same amount of commodities as the US dollarin the domestic market. Belgium’s GDP to market exchange rate hasbeen on a downward spiral over the years. In 2008 the index was 1.279before reducing to 1.193 in 2009. The data indicates subsequentdecline from 2008 to 2015.

Question 7

Inflation is defined as the continuous increase in the prices ofcommodities in a given economy over a specific period of time(International Monetary Fund, 1977). It is characterized by a fall inthe purchasing power of the commodities due to the reduced value ofcurrency. Belgium has had relatively stable inflationary tendenciesover the years. Under the years of consideration, the inflation rateswere highest in 2009 when it reached 6%. However, it was lowestbetween 2009 and 2010 (-2%). High inflation rates are thereforeassociated with increasing deficits in the balance of payment whereaslower inflationary tendencies go in tandem with surplus in thebalance of payment accounts (Soukiazis &amp Cerqueira, 2012).

Question 8

Capital controls refer to the measures that are put in place by thegovernments of the respective countries to control the flow of thecapital markets in the current accounts. The implementation of suchframeworks may be economy-wide or specific to some sectors (Gajdeczka&amp Quirk, 1995). Like most countries in the European Union (EU),Belgium completed the first round of decontrols in 1990 (Gajdeczka &ampQuirk, 1995). Currently, the country has completed the liberalizationof the financial sector.


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Fonds monétaire international. (1996).&nbspBalance of paymentstextbook. Washington, Dc: International Monetary Fund.

Friedman, M., &amp Roosa, R. V. (1967).&nbspThe balance ofpayments: free versus fixed exchange rates. Washington: AmericanEnterprise Institute for Public Policy Research.

Gajdeczka, P., &amp Quirk, P. J. (1995).&nbspCapital accountconvertibility: Review of experience and implications for IMFpolicies. Washington, DC: Internat. Monetary Fund.

International Monetary Fund,. (1977).&nbspThe monetary approachto the balance of payments: A collection of research papers.

International Monetary Fund,. (2009).&nbspBalance of payments andinternational investment position manual. Washington, D.C:International Monetary Fund.

Karmakar, A. K. (2010).&nbspBalance of payments: Theory andpolicy : the Indian experience. New Delhi: Deep &amp DeepPublications.

Soukiazis, E., &amp Cerqueira, P. (2012).&nbspModels of balanceof payments constrained growth: History, theory and empiricalevidence. Basingstoke: Palgrave Macmillan.

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