Question

In: Economics

Assume that there are only two countries in the world: USA and Brazil, so all international...

Assume that there are only two countries in the world: USA and Brazil, so all international transactions are only between those two countries. The table gives the information regarding international transactions of USA in 2018:

ITEM

Billions of US Dollars

Imports of goods from Brazil

185

Imports of services from Brazil

120

Foreign direct investment by Brazil to the USA

14

Exports of goods to Brazil

238

Exports of services to Brazil

155

US investment to Brazil

110

Income received from Brazilians

12

Income paid to Brazilians

6

Net unilateral transfers between USA and Brazil

5

Balancing item

-3
  1. Calculate the US trade balance
  2. Calculate the US current account balance
  3. Calculate the US financial account balance
  4. Was the United States a net borrower or a net lender? Explain your answer.
  5. Assume that an exchange rate of USD increased from 3.14 Brazilian Reals to 4.62 Brazilian Reals for 1 USD. Explain how this change may affect the US trade balance, current account balance, and the financial account balance.

Solutions

Expert Solution

All figures in $billions

Trade balance is net export of goods and services:

USA export of goods and services = 238+155= 393

USA import of goods and services = 185+120= 305

Net = 393-305 = 88

Current account balance has balance of trade in goods and services and also net income and transfers.

Income received = 12 and income paid = 6

Hence, Net income = 6

Transfers = 5

hence income and transfer 6+5 = 11 with existing 88 on trade balance = 11+88 =99

Current account surplus = 99

Financial account : Foreign direct investment in USA = 14 and to Brazil 110

net deficit on financial account = 96

USA has surplus and hence will act as lender.

In this case, Real has depreciated as $1 can buy more Reals. This will make goods and services expensive from USA and imports cheaper in USA. This will deteriorate trade and Current account balance.

Financial account will be in deficit as extra money will go out of USA. Current account surplus is matched by financial account deficit to make balance of payment zero in all.

Rahul Sunny answered 6 months ago
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