Question

Balance of Payments Worksheet

Part A:

Reason for Money Received	Inflow Amount (+)	Account
Exports of goods and services	$1287	Current
Income receipts from domestically-owned assets abroad (receive profits, interest etc.)	$537
Inward direct investment	$112	Capital & Financial (C&F)
Foreign (private and government) purchasing of domestic securities (stocks, bonds, etc.)	$862
Increase of foreign deposits in domestic financial institutions (banks etc.)	$310
Total incoming money flows	$3108

Reason for Money Paid or Given Out	Outflow Amount (−)	Account
Imports of goods and services	$1996	Current
Income payments to foreign-owned assets in the domestic country (pay profits, interest etc.)	$454
Net unilateral transfers: grants and private-sector (usually family) remittances*	$105
Outward direct investment	$36	Capital & Financial (C&F)
Domestic (private and government) purchasing of foreign securities (stocks, bonds, etc.)	$251
Increase of domestic deposits in foreign financial institutions (banks etc.)	$266
Total outgoing money flows	$3108

*Unilateral transfers are treated as a net number. If the country has net unilateral outflows, it goes on the second table. If the country has net unilateral inflows, it goes on the first table.

. Suppose a domestic country’s private borrowing is larger than its private saving (so its private sector is a net borrower). The domestic country’s government is running a balanced budget (neither a surplus not a deficit).

1(a) Which does the domestic country do, lend to foreign countries or borrow from foreign countries?

(b) Which does the domestic country have, a C&F account surplus or a C&F account deficit?

(c) Which does the domestic country have, a trade surplus or trade deficit?

2. Suppose a domestic country’s private saving is larger than its private borrowing. The domestic country’s government is running a balanced budget.

(a) Which does the domestic country do, lend to foreign countries or borrow from foreign countries?

(b) Which does the domestic country have, a C&F account surplus or a C&F account deficit?

(c) Which does the domestic country have, a trade surplus or trade deficit?

Answer 1

Solution:

1

A) This BOP worksheet shows that the import value of the domestic country is more than the export which means it is borrowing from foreign countries.

B) Domestic Country have C& F account surplus as in this case as the foreign ownership is more in a domestic country than the domestic country ownership in the foreign country as the country Personal Borrowing is more.

C) A balance of trade surplus happens when the value of all exports exceeds the value of all imports. A balance of trade deficit is when the value of all imports exceeds the value of all exports, In this Case, Domestic Country Import is more than Export, As we can see that total exports are $1287 and Import is $ 1996.So Trade Balance = Export - Import, =(1287-1996) which equals (-709).So Domestic country has a trade deficit.

2)

A) If in domestic country private saving is more than the private borrowing then the country has enough to invest so it will lend to foreign countries.

B)In this situation, we will have capital and financial account deficit as Personal savings are more in the country which means a deficit in the country has increased the interest rate.

C)When in a country Public Saving is more then there is a trade deficit as people tend to save more when the country is having the trade surplus.