Question

c) Suppose Britain’s purchases of rest-of-world assets equal £70 billion (£ is the symbol for the pound, Britain’s currency), rest-of-world purchases of British assets equal £90 billion, and Britain’s exports equal £40 billion. What is Britain’s balance on capital account? Its balance on current account? Its total imports?

Answer 1

Current Account Balance is £40 billion, Capital Account Balance is £20 and Total Import is £70 billion

Explanation

Current Account comprises of Exports and Imports of Goods and Services. It is equal to Export of Goods and Services (forex is coming into the domestic country) minus Import of Goods and Services (forex is going out of the domestic country). So, Exports of Britain are £40 billion and imports are nil. Therefore Balance on current account is equal to £40 -0 i.e. £40 billion

Capital Account comprises purchase of foreign assets by domestic country and purchase of domestic country’s assets by foreign country. It is equal to purchase of domestic country’s assets by foreign country minus purchase of foreign assets by domestic country. So, purchase of domestic country’s (Britain) assets by foreign country is £90 billion (forex is coming into the domestic country by sale of assets) and purchase of foreign assets by domestic country (Britain) is £70 billion (forex going out of the domestic country in return for the purchased assets from foreign). Therefore Balance on capital Account is equal to £ (90-70) i.e. £20.

Balance of Trade (BOT) = Balance on current account+ Balance on capital Account

Balance of Trade (BOT) = £ (40+20) = £60

Total Imports of Britain = Imports of Goods and Services by Britain + Purchase of foreign assets by Britain

Total Imports of Britain = 0 + £70 billion = £70 billion