Problem Set 2 - Answers
(due Tuesday, September 27)
Part I: Record the following transactions into the U.S. balance of payments:
1. The Federal Reserve sells $10 worth of Euros and buys $10 worth of dollars from a bank in Frankfurt.
2. An American investors buys $20 worth of shares in a Chinese company. The investor pays with a check
drawn on his dollar account at Citibank.
3. Microsoft pays $30 worth of dividends to its investor in Germany. Microsoft sends a check drawn on its
dollar account at Citibank.
4. A U.S. importer buys $40 worth of BMW cars. The importer pays with a check drawn on his Euro account
in Frankfurt.
5. Japanese publisher pays $50 worth of royalties to an American author. The publisher sends a check
drawn on his Yen account in Japan.
Composition of BoP
Credit
Debit
Current Account
Goods (lines 2+20)
40
Services (lines 4+21)
50
Income (lines 12+29)
30
Unilateral transfers (line 35)
Capital Account (line 39)
Financial Account
U.S.–owned assets abroad (line 40) (changes in U.S. holdings of foreign assets)
Foreign Securities (line 52)
20
U.S. Claims abroad (lines 53+54)
40
50
20+30
10
Foreign–owned assets in the U.S. (line 55) (changes in foreign holdings of U.S. assets)
U.S. Securities (line 65+66)
U.S. Liabilities abroad (lines 68+69)
Official Reserves
U.S. official reserve assets (line 41)
10
Foreign official assets in the U.S. (line 56)
Useful Balances
Balance
Current Account (CA)
-20
Trade Balance (goods)
-40
Trade Balance (goods and services)
10
Non-reserve Capital Account (KA)
10
Overall Balance = CA + KA
-10
Official Settlements Balance (OR)
10
Change in Official Reserve Assets (∆R)
-10
Net Private Capital Inflow = KA
10
Net Official Capital Inflow = OR
10
Net Change in Foreign Wealth/Investment Position = CA
-20
Part II: Consider the U.S. balance of payments from the second quarter of 2005 (released last
Friday, 9/16) and answer the following questions:
1. Did the U.S. import more goods than it exported?
Exports of goods: 253
Imports of goods: 463
Yes.
2. Did the U.S. sell more services than it bought?
Exports of services: 103
Imports of services: 86
Yes.
3. Did the U.S. receive more income from its assets abroad (dividends, interest, repatriated
profits) than foreigners received on their investment in the U.S.?
Income from assets abroad: 53
Payments on foreign-owned assets: 56
NO.
4. Did U.S. residents receive more private remittances than they sent?
Net private remittances: -14
No. U.S. residents paid more than they received.
5. Did the U.S. experience net capital inflows or outflows?
Balance of Current Account: -218
U.S. experienced capital inflow.
6. Did the U.S. private sector increase its holding of foreign assets?
(line 50) U.S. private assets : -213
Yes. U.S. increased (imported) foreign assets.
7. Did the U.S. private sectors increase its foreign liabilities?
(line 63) Other foreign assets in the U.S: +292
Yes. U.S. exported U.S. assets and hence increased its foreign liabilities.
8. Did the U.S. experience net private capital inflows or outflows?
Increase in foreign assets (outflow): 213
Increase in foreign liabilities (inflow): 292
Net private capital inflow of 79.
9. Did the U.S. do more foreign direct investment abroad than the rest of the world did in the
U.S.?
U.S. outward FDI: 47
U.S. inward FDI: 48
NO.
10. Did the U.S. buy more foreign securities than it sold foreign securities?
The balance on foreign securities: -52
Yes. U.S. bought (imported) foreign securities.
11. Did the U.S. buy on net more foreign securities than it sold U.S. securities?
Purchases of foreign securities: 36
Sales of U.S. securities: 122(other than treasury) + 10 (treasury) = 132
No. U.S. sold far more U.S. securities than it bought of foreign securities.
12. Did the Federal Reserve increase its official reserves?
Balance on Official Reserve assets: -0.56
Yes. The Fed bought (imported) foreign reserves.
13. Did the foreign central banks increase their dollar denominated official reserves?
Foreign official assets in the U.S. 74
Yes. U.S. exported 82 worth of U.S. assets to foreign central banks.
Part III: Consider Japanese balance of payments for 2004 and answer the following questions:
1. Did Japan import more goods than it exported?
Goods exports: 568
Goods imports: 474
No.
2. Did Japan sell more services than it bought?
Services exports: 110
Services imports: 134
No.
3. Did Japan receive more income than it had to pay?
Income receipts: 141
Income payments: 38
Yes.
4. Did Japan experience net capital inflows or outflows?
Current account balance: +166
Capital outflows.
7. Did Japan experience net private capital inflows or outflows?
Financial Account n.i.e. -123
Japan imported more of its assets than it imported, i.e. private capital outflow.
8. Did Japan do more foreign direct investment abroad than the rest of the world did in Japan?
Outward FDI: 45
Inward FDI: 3
Yes.
9. Did Japan buy more foreign securities than it sold?
Balance on portfolio investment assets: -196
Yes. On net, Japan purchased (imported) foreign securities.
10. Did Japan sell more of Japanese securities than it bought Japanese securities?
Purchases of foreign securities:196
Sales of Japanese securities: 183
No.
11. Did the Japanese Central Bank increase its official reserves?
Reserve Assets: -22
Yes. Japanese Central bank bought (imported) official reserves.