Trade-Balance-Assignment-Answers

1.     Use the following information to answer the questions below. Assume that the capital account is equal to 0.

Net unilateral transfers	250
Exports of goods and services	500
Net increase in the U.S. government’s nonreserve foreign assets	30
Net increase in foreign ownership of U.S.-based nonreserve assets	400
Net increase in U.S. private assets abroad	250
Invest income received in the United States	200
Net increase in U.S. ownership of official reserve assets	20
Imports of goods and services	600
Net increase in foreign ownership of U.S.-based reserve assets	100
Investment income paid abroad by the United States	300

a.    What is the current account balance?

b.   Does the capital account equal the current account?

c.    What is the statistical discrepancy?

Answers:

a.    The current account is 500 + 200 - 600 - 300 + 250 = -250

b.   The capital account is 100 + 400 - 20 - 30 - 250 = 200

c.    The statistical discrepancy is –1 ´ (–250 + 200) = –250

2.     Look at each of the cases below from the point of view of the balance of payments for the United States. Determine the subcategory of the current account or financial account that each transaction would be classified in, and state whether it would enter as a credit or debit.

a.    The U.S. government sells gold for dollars.

b.   A migrant worker in California sends $500 home to his village in Mexico.

c.    An American mutual fund manager uses the deposits of his fund investors to buy Brazilian telecommunication stocks.

d.   A Japanese firm in Tennessee buys car parts from a subsidiary in Malaysia.

e.    An American church donates five tons of rice to the Sudan to help with famine relief.

f.    An American retired couple flies from Seattle to Tokyo on Japan Airlines.

g.    The Mexican government sells pesos to the United States Treasury and buys dollars.

1- Answers:

a.    The current account is 500 + 200 - 600 - 300 + 250 = -250

b.   The capital account is 100 + 400 - 20 - 30 - 250 = 200

c.    The statistical discrepancy is –1 ´ (–250 + 200) = –250

2- Answers:

a.    The United States “exports” official reserve assets; it is a credit in the capital account.

b.   A resident of the United States unilaterally transfers money to a foreign locale; it is a debit in the current account.

c.    There is an “import” of foreign assets; it is a debit in the capital account under the category of a net change in U.S. private assets abroad.

d.   An American-based producer imports goods; it is a debit in the current account.

e.    There is a unilateral transfer from the United States to abroad foreign country; it is a debit in the current account.

f.    American residents purchase a service from a foreign firm; it is a debit in the current account.

g.    There is a net increase in non reserve foreign assets held by the U.S. government; it is a debit in the capital account.