ECS3703 LATES EXAM PACK

FI 2019 QUESTION 1 (a) NAME AND EXPLAIN THE ITEMS OF THE FINANCIAL ACCOUNT OF THE SOUTH AFRICAN BOP. 1 The Financial Account Records exchanges of international asset Subdivided into: direct investment, portfolio investment and other investment • Direct investment foreign investment in South Africa and investments abroad by South Africans. • Portfolio investment is the purchase and sale of financial instruments such as bonds, treasury bills and equities. • Other investment includes all financial transactions not part of direct or portfolio investment. Main item is trade credit. Direct investment is considered more desirable than portfolio investment because it shows stronger commitment to invest. It is more stable and has lasting positive effects on the domestic economy. Portfolio investment on the other hand is characterised by speculative “hot money” flows which may prove disruptive and difficult for monetary authorities to control. Direct investment may also bring with it much needed scarce skills and technology. 2 The Current Account Subdivided into, trade account, net service receipts, net income receipts and current transfers. • Trade account-trade in physical goods. Trade balance not shown explicitly. Is calculated by subtracting merchandise imports from merchandise exports plus net gold exports. (X+NX- I) • This Service items – are transport of goods and passengers between countries • Income items are interest, dividends and foreign branch profits. • Current transfers – foreign payments and receipts of government social security payments and taxes, private transfers of income (gifts, donations). 3 Unrecorded transactions Arises from the use of a double entry accounting system to reconcile the balance of payments. Serves as a residual that ensures that the balance of payment accounts always balance. 4 The official reserves Records changes in the official gold and foreign exchange reserves. Changes in gold and foreign exchange reserves are also referred to as the below the line or 'accommodating' foreign exchange flows. Transactions not related to changes in official reserves are called autonomous or above the line flows. Any imbalance in these flows is accommodated by the required change in official reserves. (b) DISCUSS COSTS AND BENEFITS OF DOLLARISATION Dollarization refers to a nation adopting the currency of another country (most often the dollar) as its legal tender. Advantages/ benefits Disadvantages/costs Benefits are similar to those of adopting a currency board arrangement, only they are more pronounced because the nation gives up its “exit” option to abandon the system. • The country avoids the cost of exchanging the domestic currency for dollars and need to hedge foreign exchange risks. • A country faces a rate of inflation similar to that of the US. • Avoids foreign exchange crises and need for foreign exchange and trade controls, fostering budgetary discipline. • Encouraging more rapid and full international financial integration costs. • Cost of replacing the domestic currency with the dollar. • Loss of independence of monetary and exchange rate polices. • Loss of its central bank as a lender of last resorts to bail out domestic banks and other financial institutions facing a crisis. QUESTION 2 (a) The principle of stimulating long-run growth in the economy with macroeconomic policies is illustrated. Relying primarily on government (which is per definition the case when we talk about policies) to stimulate growth is a socialist point of view. In a capitalist economy, the task of the government is more to create a favourable climate (say, combat crime) for economic growth.