Question

Balance of Payments Accounts		National Income and Product Accounts
Current account	100	GNE	750
Capital account	20	Consumption	550
Net factor income from abroad	30	Government purchases	50
Net unilateral transfers	10	Government saving	40

1. What is the value of financial account?
2. What is the value of investment?
3. What is the value of trade balance?
4. What is the value of GNDI?
5. What is the value of national saving?
6. What is the value of private saving?
7. [6 points] Assume that citizens of this economy reduce their private savings due to a lack of precautionary motives. All else equal, how would this change affect the current account balance? Explain why.

Answer 1

1. BOP = current account + capital account + financial account = 0

BOP is always balanced

current account + capital account + financial account = 0

100+ 20 + financial account = 0

financial account = -100-20 = -120

2. GNE = consumption + Government purchases + investment

750 = 550 + 50 + investment

Investment = 750 – 550 – 50 = 150

3. Current account = Net factor income from abroad + Net unilateral transfers + trade balance

100= 30 + 10 + trade balance

Trade balance = 100 – 30- 10 = 60

4. GNDI = GDP – taxes

GDP = GNE + trade balance = 750 + 60 = 810

Government saving = taxes - Government purchases

40 = taxes – 50

Taxes = 40 + 50 = 90

GNDI = 810 + 90 = 900

5. national saving = private saving + government saving

= GDP – Consumption – taxes + 40

= 810 – 550 – 90 + 40

= 210

1. private saving = GDP – Consumption – taxes

= 810 – 550 – 90 = 170