Question

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:

1. What is Pogo’s international net worth at the start of 2019? Show your work.

2. What is Pogo’s current account, CA, in 2019. Show your work.

3. What is Pogo’s trade account, TA, in 2019. Show your work.

4. What is Pogo’s international net worth at the start of 2020? Show your work.

Answer 1

solution1. Estimation of International Net worth of Pogo at the start of 2019 is given as below : HERE PA IS POGO ASSESTS .

PA admitted via Foreign at the origin of 2019 is Interest installments refunded upon foreign residents at PA admitted by Foreign in 2019 / Interest Rate at PA

Where m is million ,

= $ 48 m/ .08 = $ 600 m

Foreign Assets declared by Pogo at the origin of 2019 is Interest adjustments obtained from foreign Assets controlled by Pogo in 2019 / Interest Rate on Foreign Assets

= $ 45 million/ .05 = $ 900 million

Therefore, International Net worth of Pogo at the start of 2019 = Foreign Assets held by Pogo at the source of 2019 - PA owned by Foreign at the start of 2019

= $ 900 m - $ 600 m

= $ 300 m

HERE PCA IS POGO CURRENT ACCOUNT AND PTA IS POGO TRADE ACCOUNT .

solution2. Estimation of PCA in 2019:

PCA in 2019 is Federal Reserve Bank of Pogo’s holding of fA start of 2020 - Federal Reserve Bank of Pogo’s holding of fA start to 2019

= $77 m- $85 m

= - $8 m

therefore, some lack of $8m in Current Account in 2019

solution3. Estimation of PTA in 2019:

Admitting these is pretended that no foreigners are serving in pogo also no Pogo residents running in foreign while certain years,

PTA during 2019 is Current Account – Net Interest Cash

= - $8 m – ($ 45 m - $ 48 m)

= - $8 m + $3 m

= - $5 m

hence, a lack of $5 m into Trade Account within 2019

solution 4. Estimation of International Net worth from Pogo at the spring of 2020:

HERE PA IS POGO ASSETS AND FA IS FOREIGN ASSETS

PA held through Foreign at the origin of 2019IS Interest payments returned to foreign residents on PA owned by Foreign in 2019 / Interest Rate on PA

= $ 46 M/ .08 = $ 575 M

FA held by Pogo at the commencement of 2019 IS Interest cash obtained from fA maintained by Pogo in 2019 / Interest Rate on Foreign Assets

= $ 52 m/ .05 = $ 1040 m

Hence, International Net worth of Pogo at the spring of 2019 IS FA admitted by Pogo at the start of 2019 - PA granted by Foreign at the origin of 2019

= $ 1040 m - $ 575 m

= $ 465 m