Introduction

Current account: Activities

1 In the current account of the balance of payments, items such as merchandise exports and imports as well as payments for services and receiving of dividends from foreign shares are recorded.

Correct. The statement is indeed true.

All these items are recorded in the current account. Dividends from foreign shares are recorded under income receipts.

Incorrect. The statement is true.

All these items are recorded in the current account. Dividends from foreign shares are recorded under income receipts.

2 If a South African farmer sells a second-hand tractor to a Nigerian farmer, this transaction …

Incorrect.

The balance of payments measures the movements of value across national borders and therefore includes the value of second-hand goods. In the calculation of GDP, however, it is excluded.

Correct.

The balance of payments measures the movements of value across national borders and therefore includes the value of second-hand goods and capital goods.

Incorrect.

It is recorded under merchandise exports in the current account. The balance of payments measures the movements of value across national borders and therefore includes the value of second-hand goods and capital goods.

Included in the capital transfers are grants from foreign governments, debt forgiveness and transfers by migrants.

Incorrect.

It is recorded under merchandise exports in the current account. The balance of payments measures the movements of value across national borders and therefore includes the value of second-hand goods and capital goods.

3 Salaries earned by South Africans from other countries are …

Incorrect.

Salaries earned by South Africans from other countries are classified as compensation of employee, and not investment income, and are recorded under income receipts.
Investment income includes dividends, interest, profits and other forms of income earned from the provision of financial capital.

Correct.

Salaries earned by South Africans from other countries are classified as compensation of employees and recorded under income receipts.

Incorrect.

Salaries earned by South Africans from other countries are classified as compensation of employees and recorded under income receipts.

Services received is a record of all international transactions for services only. Services include transportation, insurance, hotel, restaurant, legal and consulting.

4 The decline in foreign tourists during the COVID-19 pandemic will have a negative effect on services receipts on the balance of payments.

The statement is indeed true.

The spending by foreigners on accommodation, meals, transport, etc. is recorded under services receipts. As fewer foreigners visit South Africa, we receive less and this negatively influences our services receipts.

Incorrect. The statement is true.

The spending by foreigners on accommodation, meals, transport, etc. is recorded under services receipts. As fewer foreigners visit South Africa, we receive less and this negatively influences our services receipts.

5 The interest payments on foreign loans by South African firms are recorded …

Correct.

Income payments consist of income payments from South African residents to the rest of the world. The interest payments on loans are recorded as part of income payments.

Incorrect.

They are recorded under income payments, which consist of income payments from South African residents to the rest of the world.

Payments for services is a record of all international transactions for services only. Services include transportation, insurance, hotel, restaurant, legal and consulting.

Incorrect.

They are recorded under income payments, which consist of income payments from South African residents to the rest of the world.

In the current transfer account, transactions such as private transfers of income, gifts, personal, immigrant and other remittances and charitable donations are recorded.

6 The purchase of machinery by a South African manufacturing firm is recorded under the item …

Correct.

Merchandise imports include the trade in all physical goods, which consist of raw material as well as intermediate and final goods. Included under final goods are capital goods such as machines.

Incorrect.

The purchase of machinery by a South African manufacturing firm is recorded under the item merchandise imports in the current account.

Incorrect.

The purchase of machinery by a South African manufacturing firm is recorded under the item merchandise imports in the current account.

Incorrect.

The purchase of machinery by a South African manufacturing firm is recorded under the item merchandise imports in the current account.

7 The capital transfer account relates to grants from foreign governments, debt forgiveness and transfers by migrants.

Correct. The statement is indeed true.

The capital transfer account relates to grants from foreign governments, debt forgiveness and transfers by migrants.

Incorrect. The statement is true.

The capital transfer account relates to grants from foreign governments, debt forgiveness and transfers by migrants.

Data questions

Questions 8 to 11 are based on the following:

Use the following information from a hypothetical country to compile a current account for the country and then answer the questions:

Item Value (R millions)
Merchandise exports, free on board 1 102
Merchandise imports, free on board 1 103
Net gold exports 66
Services receipts 210
Payments for services 215
Income receipts 81
Income payments 221
Current transfers (net receipts +) -38
Capital transfer account (net receipts +) 2
Net direct investment -71
Net portfolio investment 219
Net financial derivatives -4
Net other investment -8
Reserve assets -25

8 The balance on the current account is …

R
million

Correct.

Current account Value (R millions)
Merchandise exports, free on board 1 102
Net gold exports 66
Services receipts 210
Income receipts 81
less Merchandise imports, free on board -1 103
less Payments for services -215
less Income payments -221
Current transfers (net receipts +) -38
Balance on current account -118

Incorrect.

Current account Value (R millions)
Merchandise exports, free on board 1 102
Net gold exports 66
Services receipts 210
Income receipts 81
less Merchandise imports, free on board -1 103
less Payments for services -215
less Income payments -221
Current transfers (net receipts +) -38
Balance on current account -118

9 The current account is in a …

Incorrect.

The balance is –R118 million, which indicates that it is in a deficit.

Correct.

The balance is –R118 million, which indicates that it is in a deficit.

10 A current account deficit is necessarily a bad thing.

Incorrect. The statement is false.

A current account deficit is not necessarily a bad thing. It depends on the circumstances and the underlying causes of the deficit. See page 130 of the textbook.

Correct. The statement is indeed false.

A current account deficit is not necessarily a bad thing. It depends on the circumstances and the underlying causes of the deficit. See page 130 of the textbook.

11 The trade balance is …

R
million

Correct. The trade balance is R65 million.

Trade account Value (R millions)
Merchandise exports, free on board 1 102
Net gold exports 66
less Merchandise imports, free on board -1 103
Balance on trade account 65

Incorrect. The trade balance is R65 million.

Trade account Value (R millions)
Merchandise exports, free on board 1 102
Net gold exports 66
less Merchandise imports, free on board -1 103
Balance on trade account 65

12 Assume that the GDP of the country is R4 870 million at current prices. The current account deficit as a percentage of GDP is …

%

Correct. It is 2,4%.

$$
\Bigl(
\frac{
\text{Trade deficit}
} {
\text{GDP}
}
\Bigl)
\times 100
$$

$$
\Bigl(
\frac{118}{4870}
\Bigl)
\times 100
$$

Incorrect. It is 2,4%.

$$
\Bigl(
\frac{\text{Trade deficit}}{\text{GDP}}
\Bigl)
\times 100
$$

$$
\Bigl(
\frac{118}{4870}
\Bigl)
\times 100
$$

= 2,4%

South African data

Activities 13 to 15 are based on the table Balance of Payment from the SARB Quarterly Bulletin, June 2020.

13 For the period 2012 to 2019 both the trade balance and the balance on the current account recorded deficits for every year.

Incorrect. The statement is false.

For the period 2012 to 2019 the balance on the current account recorded deficits for every year.

The trade balance recorded surpluses in 2016, 2017, 2018 and 2019.

Correct. The statement is false.

For the period 2012 to 2019 the balance on the current account recorded deficits for every year.

The trade balance recorded surpluses in 2016, 2017, 2018 and 2019.

14 The increase in the trade surplus from R24 281 million in 2018 to R39 321 million in 2019 is mainly the result of the increase in services receipts.

Incorrect. The statement is false.

It is true that services receipts increased from R96 507 million to R116 781 million. However, the trade balance is the difference between exports and imports of goods only. It excludes services receipts.

Correct. The statement is indeed false.

It is true that services receipts increased from R96 507 million to R116 781 million. However, the trade balance is the difference between exports and imports of goods only. It excludes services receipts.

15 If a country records a trade surplus, it follows that the export of goods as a percentage of GDP is ______ than the import of goods as a percentage of GDP.

Correct.

The trade balance measures the difference between the export of goods and the import of goods. A trade surplus therefore implies that the export of goods is greater than the import of goods and it therefore follows that the export of goods as a percentage of GDP will be greater than the import of goods as a percentage of GDP.

Incorrect.

The trade balance measures the difference between the export of goods and the import of goods. A trade surplus therefore implies that the export of goods is greater than the import of goods and it therefore follows that the export of goods as a percentage of GDP will be greater than the import of goods as a percentage of GDP.

Questions 16 to 18 are based on the following:

Use the online statistical query tool of the SARB to calculate the trade deficit, the trade surplus and the current account balance as a percentage of GDP for the period 2008 to 2019.

16 In which year was the deficit current account balance as a percentage of GDP the highest?

Correct. It was at 5,8% of GDP in 2013.

Year Balance on current account
KBP5007J		 Trade balance
KBP5010J		 GDP
KBP600J		 Current account as % of GDP Trade deficit as % of GDP
2008 -131172 -14523 2369063 -5.5 -0.6
2009 -68418 28104 2507677 -2.7 1.1
2010 -41245 59744 2748008 -1.5 2.2
2011 -67061 49213 3023659 -2.2 1.6
2012 -166949 -36790 3253851 -5.1 -1.1
2013 -204841 -69408 3539977 -5.8 -2.0
2014 -192966 -54871 3805350 -5.1 -1.4
2015 -187006 -47069 4049884 -4.6 -1.2
2016 -125102 30791 4359061 -2.9 0.7
2017 -118234 64939 4653579 -2.5 1.4
2018 -172962 24281 4873899 -3.5 0.5
2019 -153176 39321 5077625 -3.0 0.8

 

Incorrect. It was at 5,8% of GDP in 2013.

Year Balance on current account
KBP5007J		 Trade balance
KBP5010J		 GDP
KBP600J		 Current account as % of GDP Trade deficit as % of GDP
2008 -131172 -14523 2369063 -5.5 -0.6
2009 -68418 28104 2507677 -2.7 1.1
2010 -41245 59744 2748008 -1.5 2.2
2011 -67061 49213 3023659 -2.2 1.6
2012 -166949 -36790 3253851 -5.1 -1.1
2013 -204841 -69408 3539977 -5.8 -2.0
2014 -192966 -54871 3805350 -5.1 -1.4
2015 -187006 -47069 4049884 -4.6 -1.2
2016 -125102 30791 4359061 -2.9 0.7
2017 -118234 64939 4653579 -2.5 1.4
2018 -172962 24281 4873899 -3.5 0.5
2019 -153176 39321 5077625 -3.0 0.8

17 In which year was the trade surplus as a percentage of GDP the highest?

Correct. It was at 2,2% of GDP in 2010.

Year Balance on current account
KBP5007J		 Trade balance
KBP5010J		 GDP
KBP600J		 Current account as % of GDP Trade deficit as % of GDP
2008 -131172 -14523 2369063 -5.5 -0.6
2009 -68418 28104 2507677 -2.7 1.1
2010 -41245 59744 2748008 -1.5 2.2
2011 -67061 49213 3023659 -2.2 1.6
2012 -166949 -36790 3253851 -5.1 -1.1
2013 -204841 -69408 3539977 -5.8 -2.0
2014 -192966 -54871 3805350 -5.1 -1.4
2015 -187006 -47069 4049884 -4.6 -1.2
2016 -125102 30791 4359061 -2.9 0.7
2017 -118234 64939 4653579 -2.5 1.4
2018 -172962 24281 4873899 -3.5 0.5
2019 -153176 39321 5077625 -3.0 0.8

 

Incorrect. It was at 2,2% of GDP in 2010.

Year Balance on current account
KBP5007J		 Trade balance
KBP5010J		 GDP
KBP600J		 Current account as % of GDP Trade deficit as % of GDP
2008 -131172 -14523 2369063 -5.5 -0.6
2009 -68418 28104 2507677 -2.7 1.1
2010 -41245 59744 2748008 -1.5 2.2
2011 -67061 49213 3023659 -2.2 1.6
2012 -166949 -36790 3253851 -5.1 -1.1
2013 -204841 -69408 3539977 -5.8 -2.0
2014 -192966 -54871 3805350 -5.1 -1.4
2015 -187006 -47069 4049884 -4.6 -1.2
2016 -125102 30791 4359061 -2.9 0.7
2017 -118234 64939 4653579 -2.5 1.4
2018 -172962 24281 4873899 -3.5 0.5
2019 -153176 39321 5077625 -3.0 0.8

18 In which year was the trade deficit as a percentage of GDP the highest?

Correct. It was at 2% of GDP in 2013.

Year Balance on current account
KBP5007J		 Trade balance
KBP5010J		 GDP
KBP600J		 Current account as % of GDP Trade deficit as % of GDP
2008 -131172 -14523 2369063 -5.5 -0.6
2009 -68418 28104 2507677 -2.7 1.1
2010 -41245 59744 2748008 -1.5 2.2
2011 -67061 49213 3023659 -2.2 1.6
2012 -166949 -36790 3253851 -5.1 -1.1
2013 -204841 -69408 3539977 -5.8 -2.0
2014 -192966 -54871 3805350 -5.1 -1.4
2015 -187006 -47069 4049884 -4.6 -1.2
2016 -125102 30791 4359061 -2.9 0.7
2017 -118234 64939 4653579 -2.5 1.4
2018 -172962 24281 4873899 -3.5 0.5
2019 -153176 39321 5077625 -3.0 0.8

 

Incorrect. It was at 2,2% of GDP in 2010.

Year Balance on current account
KBP5007J		 Trade balance
KBP5010J		 GDP
KBP600J		 Current account as % of GDP Trade deficit as % of GDP
2008 -131172 -14523 2369063 -5.5 -0.6
2009 -68418 28104 2507677 -2.7 1.1
2010 -41245 59744 2748008 -1.5 2.2
2011 -67061 49213 3023659 -2.2 1.6
2012 -166949 -36790 3253851 -5.1 -1.1
2013 -204841 -69408 3539977 -5.8 -2.0
2014 -192966 -54871 3805350 -5.1 -1.4
2015 -187006 -47069 4049884 -4.6 -1.2
2016 -125102 30791 4359061 -2.9 0.7
2017 -118234 64939 4653579 -2.5 1.4
2018 -172962 24281 4873899 -3.5 0.5
2019 -153176 39321 5077625 -3.0 0.8