Use the following terms for this question:
(X-M) = Current Account Balance
(CI-CO) = Capital Account Balance
(FI-FO) = Financial Account Balance
(I-S) = Investment-Saving Balance
FXB = Reserve Balance
BOP = balance of payments
GDP = gross domestic product
C = consumption
I = capital investment spending
G = government spending
The static equation for the BOP is:
A) BOP = (X-M) - (CI-CO) - (FI-FO) + FXB
B) BOP = (X-M) + (I-S) + (FI-FO) + FXB
C) BOP = (X-M) + (CI-CO) + (FI-FO) + FXB
D) BOP = GDP - [C + I +G] + (FI-FO)

Question

Quizplus · Accepted Answer

The static equation for the balance of payments is BOP = (X-M) + (CI-CO) + (FI-FO) + FXB. This equation takes into account the current account balance (exports minus imports), the capital account balance (capital inflows minus capital outflows), the financial account balance (investment inflows minus investment outflows), and the reserve balance. Option A leaves out the Investment-Saving balance, while option B includes it but leaves out the Capital Account balance. Option D uses GDP and government spending, which are unrelated to the balance of payments equation. Therefore, the correct answer is C.

Use the Following Terms for This Question