University Finance Assignment: Balance of Payments Analysis

This finance assignment solution covers key concepts in international finance, including the balance of payments and exchange rates. The assignment addresses how exchange rate fluctuations affect the balance of payments, explaining the impact of import and export dynamics. It delves into the gold standard, describing its monetary system and historical significance. The solution also differentiates between the current and financial accounts, elaborating on their components and illustrating the US trade deficit with China. Furthermore, the assignment examines the financial account, detailing its role in tracking international asset ownership and its relationship with capital flows. The solution is well-researched and offers detailed explanations of the concepts.

Running head: FINANCE
Finance
Name of the student
Name of the university
Author note

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Table of Contents
Answer 1....................................................................................................................................3
Answer 2....................................................................................................................................3
Answer 3....................................................................................................................................4
Answer 4....................................................................................................................................4
Reference list..............................................................................................................................6

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Answer 1
The balance of payments of a nation is known to measure all the economic
transactions between the people of nation and the people of other nations. It is known the
when the rate of exchange fluctuates it is known to affect the balance of payments. The
fluctuation of the exchange rate is known to only affect the balance of payments in the trade
balance. The rate of exchange is known to fluctuate when there will be change in the
domestic price or change in the demand and supply of money within a country. The exchange
rates are usually determined in the state of balance of payments. Therefore, a rise in the
imports will be led to rise to increase in demand for the foreign currency (Larrain and
Stumpner 2017). For obtaining the foreign currency, the importers will be selling the
domestic currency. Devaluation of the exchange rates also takes place when there is a trade
surplus in the balance of payments since a rise in the domestic prices is not encouraged. In
order to obtain the foreign currency, the importers are known to sell the domestic currency
for it. This will also strengthen the exchange rate of the foreign currency against the domestic
currency.
Answer 2
The gold standard is a kind of monetary system where the currency of a country is
known to have a value directly linked to gold. These particular countries are known to
convert the paper money into a fixed amount of gold. The country which is known to use
gold standard usually set a fixed price for gold and then buys gold at that particular price.
During the year 1870, under the classical gold standard, the international monetary system is
known to be largely decentralized and is market based (Borio and Disyatat 2015). Currently,
no country uses the gold currency. The main appeal of the gold standard is that it arrests
control of the issuance of money. The Gold Standard was the system under which most of the

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countries at some point of time fixed the value of the currencies in terms of a specified
amount of gold and then inked their currency to that of a country.
Answer 3
The current trade account is the summation of the trade balance, net income from
abroad and net current transfers. The financial account is known as the component of the
country’s balance of payments which is known to cover claims in regard to financial assets.
The components in financial account comprises of direct investment, portfolio investment
along with the reserve assets. On the other hand, the current account is known to deal with
the short term transactions of the country. It is also known to deal with the difference
between the savings and investment (Warnock and Warnock 2017). The current account is
known to represent the net income of the country over a period of time. It comprises of
visible, investment income along with unilateral transfers. On the other hand, the financial
account includes direct investment, reserve assets and portfolio investment assets (Shibata,
Shintani and Tsuruga 2019). It is also the component of the balance of payments of the
country which is known to cover the liabilities to non residents.
The US is currently experiencing trade deficit while trading with China. In the year
2018, US is known to face a trade deficit with China of about $222.6 billion. Since, US
exported only an amount of $74 million as it imported goods worth of $296 billion which
resulted to current account deficit in US.
Answer 4
The financial account is known as one of the components of the balance of payment
which is known to cover claims. The financial account is also used as a tracking mechanism
for the shifts in the international asset ownership (Borio and Disyatat 2015). When the
domestic ownership of the portion of the foreign assets increase, it also tends to increase the

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overall financial account. On the other hand, when there is a rise in the foreign ownership of
domestic assets, it tends to decrease the overall financial account. There will be also an
increase in the overall financial account when the foreign ownership of domestic asset
decreases.

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Reference list
Borio, C.E. and Disyatat, P., 2015. Capital flows and the current account: Taking financing
(more) seriously.
Bumann, S. and Lensink, R., 2016. Capital account liberalization and income inequality.
Journal of International Money and Finance, 61, pp.143-162.
Larrain, M. and Stumpner, S., 2017. Capital account liberalization and aggregate
productivity: The role of firm capital allocation. The Journal of Finance, 72(4), pp.1825-
1858.
Mathuva, D., 2015. The Influence of working capital management components on corporate
profitability.
Shibata, A., Shintani, M. and Tsuruga, T., 2019. Current account dynamics under information
rigidity and imperfect capital mobility. Journal of International Money and Finance, 92,
pp.153-176.
Tiberi, M., 2017. The accounts of the British Empire: Capital flows from 1799 to 1914.
Routledge.
Warnock, F.E. and Warnock, F.E., 2017. Prospective Capital Flows and Currency
Movements: US Dollar versus Euro. Darden Business Publishing Cases, pp.1-23.