Question

Use the following information to answer the next three questions.

Transactions between Japan and the rest of the world in 2019 are shown below.

1. The Japanese government sells 75 million yen worth of treasury securities to foreign investors.
2. Japanese companies purchase 500 million yen of steel from Canada.
3. Japanese automobile manufacturers sell 600 million yen worth of cars abroad.
4. PQU bank (Japanese firm) receives 20 million yen in interest from US investments.
5. Japanese citizens spend 125 million yen in tuition at US universities.
6. Japanese government buys 10 million euros in the FX market.
7. Japan gives 60 million yen in aid to Haiti.

Find the current account balance and express it in terms of millions of yen (EX: enter 2 if the answer is 2,000,000). Do not use currency symbols or words when entering your response.

Answer 1

The current account is one of three components of Balance of Payment. This account act as an important indicator of a country's economic health.

Normally it is calculated by adding up 4 important components of current account goods, services, income and current transfer. An order is followed in preparing the current account. The equation for the calculation of Current account is:-

Here, CA = current account, X = export, M = import, NY = net income from abroad, NCT = net income transfers.

Calculation of Current Account balance of Japan (in millions)

a. Japan Exports 600 (goods and services made in Japan and sold to foreign countries) b. Japan Imports (625) (purchase of steel and tuition fee at US university)

c = a + b Trade balance(deficit) (25)

Received from foreigners

d. Income receipts: primary 95 Income by the way of selling treasury securities and interest received

e. income receipts: secondary - income by the way of fines, insurance, taxes etc, received by Japan

f = d + e Subtotal Receipts 95

Paid to foreigners

g. Income payments: primary (1221) Investment in Euro at FX market

h. Income payment: secondary -  

i = g + h Subtotal Payments (1221)

Current Transfers

j. Paid to Haiti (60)

Current Account Balance  

= c + f + i + j (deficit)    (1211)

Japan has a trade deficit of 1211 million yen.

NOTE:

Purchase of euro in FX market was for an amount of 10 million. It was not specified in which rate it was purchased or for how much Japanese yen. So we took the average closing conversion price between Euro and Yen.

the average closing conversion price between Euro and Yen during 2019 was 122.10. Hence this rate was used.

If conversion was not required the current account balance stand as 0