1. Show the debit and credit entries in each balance-of-payments account, goods, services,
income, unilateral transfers, and the current account, for the following transaction.
a. A local college student travels abroad for the holidays and spends $1,000 on food
and lodging.
b. A local auto dealership imports a $20,000 automobile.
c. The home government gives a drought-stricken nation $1 million as a
humanitarian gesture.
d. You receive a $100 interest payment on a foreign government bond you own.
2. Using the following data (billions of dollars) for a given year, calculate the
balance on merchandise trade; balance on goods, services, and income; and the current
account balance. Indicate whether these balances are deficits or surpluses.
Exports of merchandise
106
Exports of services
34
Net unilateral transfers
+8
Statistical discrepancy 0
Official settlements balance 22
Imports of services
Capital inflow
Imports of merchandise
Capital outflow
29
28
6
119
Using the data in Question 2, calculate the capital account balance. Is the capital account
balance a surplus or deficit?
What is a balance-of-payments equilibrium? Considering your prior answers, is this country
experiencing a balance-of-payments deficit or surplus?
Write out a positive and negative aspect of a nation being a net debtor. Do the
same thing for a nation that is a net creditor.
Explain why a nation might desire to receive both portfolio investment and direct
investment from abroad.
Write out a single equation showing the relationship between the current account and net
capital inflows, including changes in official reserves and other government assets, as they
relate to investment spending and domestic saving.
Suppose a nation spends 10 percent of its income on investment and the private
sector saves 5 percent. Further, suppose the national government runs a deficit of 1
percent. Using the equation you derived showing the relationship between the current
account and net capital inflows and these data, explain what the above conditions mean
for the nation's capital account and current account. How might the imbalance be
corrected?
At a recent finance ministers' meeting, it was reported that Robert Rubin, former
Secretary of the U.S. Treasury, stated that "the U.S. can no longer afford to be the
importer of first resort." Using the equation you derived showing the relationship
between the current account and net capital inflows, explain why the U.S. current account
deficit can or cannot be sustained
Chapter 1 Answers
Solution 1
Example a
Example b
Example c
Example d
Merchandise
Services
Income
Unilateral Transfers
Home Assets abroad
Foreign assets in the
home country
On-Line Application
Data for December 2001 (in million euros).
Source: National Bank of Belgium (www.bnb.be )
Credit
Debit
Net
Goods&Services
Income
Current Transfers
231,662
222,634
9,028
89,269
78,659
10,610
8,149
12,717
(4,568)