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QUESTION 10 (20 minutes) LO7b) Balance of Payments Current Account (CA) 14 MARKS a) Describe briefly the composition of each of the four sub-accounts in the Balance of Payments Current Account; (8 marks) While recurring deficits may be of concern a deficit can be beneficial. Discuss one reason why a Current Account deficit of short duration could be beneficial to a country; b) (2 marks) c) Based on the figures below, calculate the countrys: i. Current Account on the Balance of Payments i. The size of the GDP 2 marks) 2 marks) Consumption Investment Government Merchandise - imports Merchandise-exports Services - imports Services -exports Investment payments Investment receipts Unilateral transfer payments Unilateral transfer receipts 3 500 250 750 950 1150 1225 1145 125 170 20 10 No mark will be awarded unless the complete calculation is shown.
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a) The four sub-accounts of Balance of payments are: Trade in goods: Export of goods -Import of goods Trade in services: Export of services- Import of services *Investment income: Income earned or generated from making foreign investment Transfer payment: Net transfers of money made to and from international borders These four components sum up the current account balance in the BOP. b) Current account deficits in the short run can be beneficial for the country, as they might be generated purposely to correct the countrys foreign exchange rate, under the floating exchange rate regime. A country suffering from a depreciating currency or exchange rate might resort to buying foreign currency or encouraging imports which would help increase the value of the currency but leads to deficit. Such a type of deficit induced by a policy is beneficial. However, it becomes a problem when this deficit becomes recurring. c) Current account (BOP)-(1150-950) + (1145-1225)+ (170-125)+ (10-20) Current account (BOP) 155 GDP C+I+G+X-M GDP 3500+250750+(1150-950) +(145-1225) GDP = $4620

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