Page 153 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 12 : Equilibrium and Disequilibrium in BOP

(ii) When exchange rates are fixed and a nation at full employment has a balance of payments Notes
surplus, the result in that nation will be
(a) a declining price level (b) falling currency income
(c) inflation (d) rising real income
(iii) The use of exchange controls to eliminate a nation's balance of payments deficit results in
decreasing the nation's
(a) imports (b) exports
(c) price level (d) income
(iv) Which condition did a nation have to fulfill if it were to be under the gold standard?
(a) use only gold as a medium of exchange
(b) maintain a flexible relationship between its gold stock and its currency supply
(c) allow gold to be freely exported from and imported into the nation
(d) define its monetary unit in terms of a fixed quantity of dollars
(v) If the nations of the world were on the gold standard and one nation has a balance of payments
surplus,
(a) foreign exchange rates in that nation would rise
(b) gold would tend to be imported into that country
(c) the level of prices in that country would fall
(d) employment and output in that country would fall
(vi) Which was the principal disadvantage of the gold standard?
(a) unstable foreign exchange rates
(b) persistent payments imbalances
(c) the uncertainties and decreased trade that resulted from the depreciation of gold
(d) the domestic macroeconomic adjustments experienced by a nation with a payments deficit
or surplus
12.3 Summary

• The main purpose of this unit is to arrive at definitions of balance of payments equilibrium
sufficiently precise to furnish policy-makers with meaningful guides.
• There is no doubt that a study of country’s balance of payment reveals much information about
its economic position and development of the country. But when we are to see that a country is
heading towards financial bankruptcy or higher standard of living, we are to examine the balance
of payments of many years of that country.
• Balance of payments equilibrium occurs when induced balance of payments transactions---
those engineered by the government to influence the nominal exchange rate---are zero. This
implies that autonomous receipts from exports and the sale of securities abroad equal
autonomous payments for imports and the purchase of securities from foreign residents. Since
changes in the stock of official reserves of foreign exchange are the method used by the authorities
to fix or otherwise manipulate the exchange rate, balance of payments equilibrium requires
that the stock of foreign exchange reserves be constant.
• Static Equilibrium : The distinction between static and dynamic equilibrium depends upon
the time period. In static equilibrium, exports equal imports including exports and imports of
services as well as goods and the other items on the BOPs – short term capital, long term capital
and monetary gold are on balance, zero.
• Dynamic Equilibrium : The condition of dynamic equilibrium for short periods of time is that
exports and imports differ by the amount of short-term capital movements and gold (net) and
there are no large destabilising short-term capital movements.

LOVELY PROFESSIONAL UNIVERSITY 147