Q&A Bank part 3 Q3A.19

[shdh]

Hi,

In question 3A.19 part (v), why did we take -(8200+20) and then conclude it as a deficit when there was a surplus of 8200 in current account?

Also,
Why is there a ' - ' (minus) sign in (iv) before the bracket, and finally a negative answer to the change in reserve while the final statement is saying that there is an increase in the reserve?

Thanks & regards,
Shyam

 

[Charlie]

In (v):

Current account + Capital account + Financial account (including reserves) + NE&O = 0,

so:

+ 8,200 + 0 + Financial account (including reserves) + 20 = 0,

ie:

Financial account (including reserves) = -8,200 -20 = -8,220 (minus sign indicates a deficit).

In (vi):

Financial account is made up of investment and other financial flows and change in reserves.
From (v), financial account is -8,220.
From (iv), investment and other financial flows is -780.

So:

-8,220 = -780 + change in reserves,

ie:

Change in reserves = -8,220 + 780, which is the same as - (8,220 - 780), ie -7,440.

The "official reserves" are reserves of gold and foreign currencies, whereas in the balance of payments accounts, we are looking at flows of the domestic currency. So if the change in reserves in the balance of payments accounts is negative, then the domestic currency must be flowing out of the country. In return, foreign currencies must be flowing into the country, ie the (official) foreign currency reserves increase.

 

[shdh]

In (v):

Current account + Capital account + Financial account (including reserves) + NE&O = 0,

so:

+ 8,200 + 0 + Financial account (including reserves) + 20 = 0,

ie:

Financial account (including reserves) = -8,200 -20 = -8,220 (minus sign indicates a deficit).

In (vi):

Financial account is made up of investment and other financial flows and change in reserves.
From (v), financial account is -8,220.
From (iv), investment and other financial flows is -780.

So:

-8,220 = -780 + change in reserves,

ie:

Change in reserves = -8,220 + 780, which is the same as - (8,220 - 780), ie -7,440.

The "official reserves" are reserves of gold and foreign currencies, whereas in the balance of payments accounts, we are looking at flows of the domestic currency. So if the change in reserves in the balance of payments accounts is negative, then the domestic currency must be flowing out of the country. In return, foreign currencies must be flowing into the country, ie the (official) foreign currency reserves increase.

Thanks a lot Charlie!

You gave such a clear answer. Thanks.

Regards,
Shyam