1. REVIEW of the BOP

2. When Mexicans working in the US send remittances home, the U.S. :
1. debits transfers OR credits
2. debits services OR credits
3. debits capital OR credits
4. debits official reserves OR credits

3. Marshall-Lerner condition Review (1)
Country Xanadu estimates that the short-run price elasticity of demand for its exports is 0.3 and that the short-run price elasticity of demand for its imports is 0.5.
It decides to DEVALUE its currency (or let it depreciate as market forces are forcing it down).
A) Explain this situation (eg. Why is it depreciating OR why might Xanadu want to devalue its currency?)
B) Explain what is likely to happen to its Balance of Trade (in goods and services).

4. Marshall-Lerner condition Review (2)
Country Xanadu estimates that the LONG-RUN price elasticity of demand for its exports is 0.4 and that the LONG-RUN price elasticity of demand for its imports is 0.7
A) Why are the long-run elasticities different?
B) Explain what is likely to happen to its Balance of Trade (in goods and services).

5. what was the balance of net incomes and transfers for A?
The BOP of Country A showed the following entries for 2013: a capital and financial account surplus of 50, a deficit in the services account of 15, and a trade (merchandise) deficit of 45.
The change in the official reserves was zero. Assuming there are no errors and omissions
what was the balance of net incomes and transfers for A? t

6. The payment of a dividend by an American company to a foreign stockholder represents:
1. a debit in the U.S. capital and financial account
2. a credit in the U.S. capital and financial account
3. a credit in the U.S. official reserve account
4. a debit in the U.S. current account
5. a credit in the U.S. current account

7. Persistent BOP Imbalances
Where they matter and
Methods to correct them

8. i.e. Suppose there is a persistent…..
……………………………….
On the ………………..section of the …………………………. account of the BOP
i.e. …………………………………..<……………………
Two Main types of policies:
EXPENDITURE SWITCHING versus
EXPENDITURE REDUCING policies

9. Policies to correct a current account deficit (trade account) on the BOP
Policy
1) Do nothing
2) Get loans from other central banks or IMF
Expenditure switching
3) Protectionist trade policies
4) Devalue exchange rate
5) Advertise own goods
Evaluation 1) 2) 3) 4) 5)

10. Policies (continued) Policy Expenditure reducing
6) Contractionary macro policies
OTHERS: to increase export-competitiveness
7) Supply side policies
Evaluation 6) 7)