Tom is stuck with his friends on an island that uses coconuts for currency, but

Question

Tom is stuck with his friends on an island that uses coconuts for currency, but they recently discovered Wilson’s Island nearby. Tom’s Island agrees to make only one transaction with Wilson’s Island: It sells a fishing boat to Wilson’s for 18 coconuts. Answer the following questions, assuming that yearly consumption on Tom’s Island equals 500 coconuts, and domestic investments in huts and farm equipment equals 125 coconuts.

Instructions: Enter your answers as whole numbers.

a. What are net exports for Tom’s Island?

__ coconuts.

b. What is the total national savings for Tom’s Island?

__ coconuts.

c. Suppose Tom’s Island imports a volleyball net from Wilson’s Island for 5 coconuts. What is the total national savings now?

__coconuts.

d. Now Tom purchases 1 coconut tree on Wilson's Island at a cost of 13 coconuts. What is the balance of payments? (Hint: A coconut tree produces coconuts like a factory produces goods.)

__ coconuts.

Explanation / Answer

a. Tnet exports for Tom’s Island is 18 coconuts. Because he sells one fishing boat for 18 coconuts. So this will be counted as export .

b. Total national savings will be domestic investment + export.

That is total national saving = 125 + 18 = 143 coconuts.

c. Now here 5 coconut is considered as import. so total national savings is now (143 - 5) = 138 coconuts.

d. The balance of payments is 13 coconuts because it is considered as payments in balance of payment.

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