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). Ritania received weapons worth $200 from the US under its military program; no payment is necessary. A Ritanian firm exported $400 of cloth. A Ritanian resident is paid $10 in interest on a loan to a foreigner. Foreign tourists visited Ruritania and spent $100 in traveler’s checks. Ritanian investors invested $200 overseas and received $50 in interest on the investment that same year. A Japanese construction firm received a $150 installment payment for work done in Ruritania.

Calculate Ritania’s current account (CA) and Financial Account (FA) balances. Briefly (in one, very short sentence) interpret the CA balance.

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 is a part of BOP and its a combination of export, import, transfer payments (like, gifts, remittances, and foreign aids) investment incomes (like, dividend, interest, profits etc).

FA (Financial Account) is also a part of BOP and its a comination of foreign investments (like, FDI, FII etc.) and loas.

CA = 200 + 400 -10 +100 + 50 -150 = $590

FA = -200

Here the CA account is in surplus and FA account is in defecit.

The official reserve account, a part of the capital account, is the foreign currency and securities held by the government, usually by its central bank, and is used to balance the payments from year to year. Its increase in case of trade surplus and decrease in case of trade deficit. Here trade account (Export - import) is in surplus so, the official reserve account will incraese.