Question

1. Balance of Payment (20 p)

In Table 1 the Balance of Payment for the country “Oceania” is presented. Use the information shown in Table 1 to evaluate the following questions.

(a) Fill in the cells indicated by “ * “.

(b) Does the economy exhibit a current account surplus?

(c) Does the economy exhibit a capital account surplus?

(d) What kind of macroeconomic policy would you propose to solve any kind of disequilibrium in the balance of payment?

Table 1.

Current Account				Capital Account
Exports		250.000,00		Foreign Holdings	55.000,00
Imports		260.000,00		Domestic Holdings	45.000,00
	Trade Balance
Services exported		342.000,00
Services imported		340.000,00
	Services Balance			Net Error and Omissions
Income received		14.999,00
Income payments		15.500,00
	Income Balance
Transfers received		50,00
Transfers payments		33,00
	Transfer Balance

Answer 1

(A)

Trade balance = export - import

= 250000 - 260000

Trade balance = -10000

Service balance = service exported - service imported

= 342000 - 340000

service balance = 2000

income balance = income received - income payments

= 14999 - 15500

income balance = -501

transfer balance = transfer received - transfer payments

= 5000 - 3300

transfer balance = 1700

current account = trade balance + service balance + income balance + transfer balance

= (-10000) + 2000 + (-501) + 1700

current account = 6801 deficit

Capital account = foreign holdings - domestic holdings

= 55000 - 45000

capital account = 10000 surplus

net error and ommission

In totality the difference of capital account and current account should be zero. If the difference is not equal to zero a new account is created to nulify the difference . This account is called net error and ommission account.

net error and ommission = capital account - current account

-6801-10000 = -16801.

(B) No the economy exibits a current account deficit because the net currect account is negative 6801

(C) Yes the economy exibits a current account surplus because the net capital account has a positive balance of 10000.

(D) The macro economic policies that can be used to resolve this disequilibrium are

encouraging more of exports and imposing tarrifs on imports to reduce the imports. This will lead to a much more stable trade balance. Which is a major reason of the disequilibrium.

import substitution can be used.

reducing inflation is another method. Inflation is the increase in prices. Increasing exports and reducing imports can reduce inflation.   

Government can control the foreign exchange to reduce the supply of foreign exchange.