In 2016 the country of Ikonomia has a current account deficit of $1 billion and a nonreserve financial account surplus of $700 million. Ikonomia’s capital account is in a $150 million surplus. In addition, Ikonomian factories located in foreign countries earn $700 million. Ikonomia has a trade deficit of $600 million. Assume Ikonomia neither gives nor receives unilateral transfers. Ikonomia’s GDP is $9.4 billion.
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Work It Out, Chapter 16, Question 1
(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
In 2016 the country of Ikonomia has a current account deficit of 1 billion dollars and a nonreserve financial account surplus of 700 million dollars. Ikonomia’s capital account is in a 150 million dollars surplus. In addition, Ikonomian factories located in foreign countries earn 700 million dollars. Ikonomia has a trade deficit of 600 million dollars. Assume Ikonomia neither gives nor receives unilateral transfers. Ikonomia’s GDP is 9.4 billion dollars.
To make things easier, we will set up the problem in millions.
From the problem, we know that:
The current account deficit is 1 billion dollars.
(Description)
The following text is written:
Setting the problem (all values in millions):
CA equals negative 1000 dollars.
(Speaker)
The nonreserve financial account surplus is 700 million dollars.
(Description)
The following text is written below the previous one:
NFA equals 700 dollars.
(Speaker)
The capital account is in a 150 million dollars surplus.
(Description)
The following text is written below the previous one:
KA equals 150 dollars.
(Speaker)
Factories located in foreign countries earn 700 million dollars. Thus the exports of factor services for Ikonomia is 700 million dollars.
(Description)
The following text is written below the previous one:
EX subscript FS equals 700 dollars.
(Speaker)
The trade deficit is 600 million dollars.
(Description)
The following text is written below the previous one:
TB equals 600 dollars.
(Speaker)
There are no unilateral transfers.
(Description)
The following text is written below the previous one:
NUT equals zero.
(Speaker)
The following text is written below the previous one:
GDP is 9.4 billion dollars.
(Description)
The following text is written below the previous one:
GPD equals 9400 dollars.
(Speaker)
The question will ask if Ikonomia acquired or lost foreign assets during the year. To answer we have to calculate the financial account. Based on the data at hand, we can compute the financial account from the balance of payments identity.
We know that the balance pf payments equals the sum of the current account, the financial account, and the capital account and that the balance of payment accounts have to balance overall.
(Description)
The following relation is written:
BOP equals CA plus FA plus KA equals zero.
(Speaker)
We then isolate the financial account from the identity by moving it to the right side.
(Description)
The following relation is written below the previous one:
CA plus KA equals negative FA.
(Speaker)
Plugging in the number and solving for the financial account, we obtain 850 million dollars.
(Description)
The following relations are written below the previous ones:
negative 1000 dollars plus 150 dollars equals negative 859 dollars equals negative FA.
FA equals 850 dollars.
(Speaker)
The FA surplus indicates that on net, foreigners purchased more Ikonomian assets than Ikonomians purchased foreign assets.