Question

In 2010, the economy of the Utopia exported goods worth $232 billion and services worth another $87 billion. It imported goods worth $225 billion and services worth $56 billion. Receipts of income from abroad were $110 billion while income payments going abroad were $91 billion. Government transfers from the Utopia to the rest of the world were $23 billion, while various Utopia government agencies received payments of $16 billion from the rest of the world.

a) Calculate Utopia’s merchandise trade balance for 2010. (6 points)

b) Calculate the current account balance for 2010. (7 points)

c) Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for Utopia in 2010.

Answer 1

(a) Merchandise trade balance is the difference between goods exported and goods imported.

Thus,

Goods exported= $232 billion.

Goods imported are $225 billion.

Thus, 232 - 225 = $7 billion is the merchandise trade balance for 2010.

Merchandise trade balance is in surplus as exports are more than imports.

(b). Current account balance i

= Merchandise balance + Services balance + Primary income + Secondary income.

Merchandise balance + services balance is the balance of goods and services = Total exports - Total imports.

( 232 + 87 ) - ( 225 + 56 ) = 319 - 281 = $38 billion

Net income= $110 - $91 = $19 billion.

Net government transfers= $16 billion - $23 billion = -$7 billion

so, current account balance = $38 + $19 - $7 = $50 billion.

(c.) As the payments went abroad and the money was transferred abroad, they were on the negative side of the current account balance such as,

income payments o= $91 billion,

government transfers to the rest of the world =$23 billion.

While the money which was received from overseas such as receipts from overseas of $110 billion and $16 billion received from the rest of the world went to the positive side because the domestic economy received the money from abroad.