You are given the following information about an economy: Merchandise exports $1

Question

You are given the following information about an economy:

Merchandise exports                      $130 billion

Merchandise imports                      $60 billion

Services exports                       $90 billion

Services imports                      $110 billion

Investment income receipts                   $85 billion

Investment income payments                $50 billion

Unilateral transfers (assume this is a debit) $30 billion

1. What is the current account balance?

2. What does the current account measure? What about the financial/capital account? Assume America exports $35,000 of wheat to Japan. Record this transaction in the balance of payments.

3. China usually runs large current account surpluses. What does this imply about the financial account?

4. How are saving and investment related to the current account, and therefore, the trade balance? In your answer, use algebra from the national income accounting equation.

5. America usually runs large current account deficits. What implications does this have for America’s capital/financial account?

Explanation / Answer

1 current account balance = (Exports - imports) +Net factor payment + unilateral tarnsfers

= (130+90-60-110)+(85-50)-30 = (50+35-30)= 55

2 The current balance of a country refers to trade balance plus the income from abroad and net payments to abroad. trade balance refers to the difference between exports and imports.

Financial account is related to balance of payments in financial assets.

3. This implies exports for china are more than imports or China's netfactor payments from abroad are positive.

4 Positive current balances imply higher income and higher investments

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