Question

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Information for the economy of Pogo 2019 Interest payments received from Foreign on Foreign assets owned...

Information for the economy of Pogo

2019

  • Interest payments received from Foreign on Foreign assets owned by Pogo:                     $45M
  • Interest payments paid to Foreign citizens on Pogo assets owned by Foreign:                   $48M
  • Federal Reserve Bank of Pogo’s holding of interest-free Foreign assets, start of 2019:   $85M

                                       

2020

  • Interest payments received from Foreign on Foreign assets owned by Pogo:                     $46M
  • Interest payments paid to Foreign citizens on Pogo assets owned by Foreign:                   $52M
  • Federal Reserve Bank of Pogo’s holding of interest-free Foreign assets, start of 2020:   $77M

Assumptions:            

  • Interest rate on Foreign assets is 5% and the Interest rate on Pogo assets is 8% for both 2019 & 2020.
  • Foreign central bank does not hold Pogo assets
  • There are no Foreigners working in Pogo and no Pogo citizens working in Foreign during these years.

Questions:

What is Pogo’s balance of payments in 2019? Show your work

Solutions

Expert Solution

Hi,

Hope you are doing well!

Question:

Answer:

Balance of Payment:

Balance of payment (BOP) is the record of all the transactions made between entities in one country and the rest of the world over a defined period of time. There are three section of BOP: current account,capital account and financial account.

Current Account: Current account is measures the inflow and outflow of goods, services, investment incomes (interest, dividends, bonuses etc) and transfer of payments of a country.

Capital  Account: Capital account give the outlook of capital expenditure and income of a country Like FDI, portfolio investment or loans etc

Financial Account: It measures the financial  transactions that is not include in current and capital account.

Balance of Payment = Balance of current account + Balance of capital account + Balance of financial account

Balance of current account (2019) = Interest payments received from Foreign on Foreign assets owned by Pogo - Interest payments paid to Foreign citizens on Pogo assets owned by Foreign

= $45M - $48M = - $3M

Balance of capital account = $85M (it is interest free)

Pogo's Balance of Payment in 2019 =   - $3M + (-  $85M) = - $88M

Its show the  balance of payments deficit.

Thank You

Rahul Sunny answered 2 years ago
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