Question

Ritania is calculating its balance of payments for the year. All transactions for the year are listed below (all amounts are expressed in US dollars).

1. Ritania received weapons worth $200 from the US under its military program; no payment is necessary.
2. A Ritanian firm exported $400 of cloth.
3. A Ritanian resident is paid $10 in interest on a loan to a foreigner.
4. Foreign tourists visited Ruritania and spent $100 in traveler’s checks.
5. Ritanian investors invested $200 overseas and received $50 in interest on the investment that same year.
6. A Japanese construction firm received a $150 installment payment for work done in Ruritania.
   1. Calculate Ritania’s current account (CA) and Financial Account (FA) balances. Briefly (in one, very short sentence) interpret the CA balance.
   2. What change in the official reserve (OR) account is implied such that the balance of payments balances? Interpret (in one, very short sentence) this change.

Answer 1

Current account:

Credit=200+400+100+50=750

Debit=10+150=160

Current account balance=credit- debit=750-160=590

Financial account:

Credit= 0

Debit=200

Financial account balance=0-200=-200

0= current account balance+ financial account balance+ change in official reserve

0=590-200+ change in official reserve

Change in official reserve=-390

So official reserve must decrease by 390 to bop balances.