Question

In 2009, US foreign assets was 129 percent of GDP and its liabilities was 148 percent. Suppose that 70 percent of U.S. foreign assets are denominated in foreign currencies, but that all U.S. liabilities to foreigners are denominated in dollars (these are approximately the correct numbers). In 2009, U.S. GDP was around $14.4 trillion.

1. Compute the effect of a 10% USD depreciation on US foreign assets, US foreign liabilities and US net foreign wealth position (in USD).
2. Compute the effect of a 10% USD depreciation on the foreign assets, the foreign liabilities and the net foreign wealth position of the Rest of the World (ROW) measured in USD. Note: from ROW's point of view, the US is defined as Foreign and ROW is defined as Home.

Answer 1

According to the information,  

Value of US Foreign assets ( in $ ) is

= 129% of $14.4 trillion.

= $18.576 trillion

Value of US Foreign liabilities ( in $) is

= 148% of $14.4 trillion

= $21.312 trillion

Now 70% of US assets are in Foreign denomination i.e. 30% are in dollar values,

30% of $ 18.576 = $ 5.5728 trillion

When dollar depreciates 10% all US holdings in $ values will depreciate and all US holdings in foreign currencies will appreciate.  

Therefore , after Depreciation of 10 %

Value of US assets in $ values

= (1-10%)of 5.5728

= $5.0155 trillion

Value of US assets in foreign values

= (1+10%) of 13.002

= $ 14.3035 trillion

Value of US Liabilities in $ values

= (1-10%) of 21.312

= $19.1808 trillion.

From ROW perspective -

1. Assets reduced by 10% to $19.1808 trillion.

2. Liabilities increased by 10% to $14.3035 trillion.

3. Net foreign Wealth stands at (19.1808 - 14.3035) = $4.8773 trillion.Before depreciation it was $8.31 trillion). Therefore NFWP deteriorates by $3.4327 trillion.