PROBLEMS

  1. Below is a partial table of the OECD’s 2004 ranking of member countries based on their GDP per capita. Compute the ratio of GNI to GDP in each case. What does this imply about net factor income from abroad in each country? Compute the GNI rankings of these countries. Are there any major differences between the GDP and GNI rankings? What do these differences imply? Indicate?
  2. Note the following accounting identity for gross national income (GNI):

    GNI = C + I + G + TB + NFIA

    Using this expression, show that in a closed economy, gross domestic product (GDP), gross national income (GNI), and gross national expenditures (GNE) are the same. Show that domestic investment is equal to domestic savings.

  3. Show how each of the following would affect the U.S. balance of payments. Include a description of the debit and credit items, and in each case identify which specific account is affected (e.g., imports of goods and services, IM; exports of assets, EXA; and so on. (For this question, you may find it helpful to refer to Appendix 1.)
    • A California computer manufacturer purchases a $50 hard disk from a Malaysian company, paying the funds from a bank account in Malaysia.
    • A U.S. tourist to Japan sells his iPod to a local resident for yen worth $100.
    • The U.S. central bank sells $500 million of its holdings of U.S. Treasury bonds to a British financial firm and purchases pound sterling foreign reserves.
    • A foreign owner of Apple shares receives $10,000 in dividend payments, which are paid into a New York bank.
    • The central bank of China purchases $1 million of export earnings from a firm that has sold $1 million of toys to the United States, and the central bank holds these dollars as reserves.
    • The U.S. government forgives a $50 million debt owed by a developing country.
  4. In 2010 the country of Ikonomia has a current account deficit of $1 billion and a nonreserve financial account surplus of $750 million. Ikonomia’s capital account is in a $100 million surplus. In addition, Ikonomian factories located in foreign countries earn $700 million. Ikonomia has a trade deficit of $800 million. Assume Ikonomia neither gives nor receives unilateral transfers. Ikonomia’s GDP is $9 billion.
    • What happened to Ikonomia’s net foreign assets during 2010? Did it acquire or lose foreign assets during the year?
    • Compute the official settlements balance (OSB). Based on this number, what happened to the central bank’s (foreign) reserves?
    • How much income did foreign factors of production earn in Ikonomia during 2010?
    • Compute net factor income from abroad (NFIA).
    • Using the identity BOP = CA + FA + KA, show that BOP = 0.
    • Compute Ikonomia’s gross national expenditure (GNE), gross national income (GNI), and gross national disposable income (GNDI).
  5. To answer this question, you must obtain data from the Bureau of Economic Analysis (BEA), http://www.bea.gov, on the U.S. balance of payments (BOP) tables. Go to interactive tables to obtain annual data for 2008 (the default setting is for quarterly data). It may take you some time to become familiar with how to navigate the website. You need only refer to Table 1 on the BOP accounts. Using the BOP data, compute the following for the United States:
    • Trade balance (TB), net factor income from abroad (NFIA), net unilateral transfers (NUT), and current account (CA)
    • Financial account (FA)
    • Official settlements balance (OSB), referred to as “U.S. official reserve assets” and “Foreign official assets in the U.S.”
    • Nonreserve financial account (NRFA)
    • Balance of payments (BOP). Note that this may not equal zero because of statistical discrepancy. Verify that the discrepancy is the same as the one reported by the BEA.
  6. Continuing from the previous question, find nominal GDP for the United States in 2008 (you can find it elsewhere on the BEA site). Use this information along with your previous calculations to compute the following:
    • Gross national expenditure (GNE), gross national income (GNI), and gross national disposable income (GNDI)
    • In macroeconomics, we often assume the U.S. economy is a closed economy when building models that describe how changes in policy and shocks affect the economy. Based on the previous data (BOP and GDP), do you think this is a reasonable assumption to make? Do international transactions account for a large share of total transactions (involving goods and services, or income) involving the United States?
  7. During the 1980s, the United States experienced “twin deficits” in the current account and government budget. Since 1998 the U.S. current account deficit has grown steadily along with rising government budget deficits. Do government budget deficits lead to current account deficits? Identify other possible sources of the current account deficits. Do current account deficits necessarily indicate problems in the economy?
  8. Consider the economy of Opulenza. In Opulenza, domestic investment of $400 million earned $20 million in capital gains during 2012. Opulenzans purchased $120 million in new foreign assets during the year; foreigners purchased $160 million in Opulenzan assets. Assume the valuation effects total $1 million in capital gains.
    • Compute the change in domestic wealth in Opulenza.
    • Compute the change in external wealth for Opulenza.
    • Compute the total change in wealth for Opulenza.
    • Compute domestic savings for Opulenza.
    • Compute Opulenza’s current account. Is the CA in deficit or surplus?
    • Explain the intuition for the CA deficit/surplus in terms of savings in Opulenza, financial flows, and its domestic/external wealth position.
    • How would a depreciation in Opulenza’s currency affect its domestic, external, and total wealth? Assume that foreign assets owned by Opulenzans are denominated in foreign currency.
  9. This question asks you to compute valuation effects for the United States in 2004, using the same methods mentioned in the chapter. Use the bea.gov website to collect the data needed for this question: look under the “International” heading.

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    Visit the BEA’s balance of payments data page and obtain the U.S. balance of payments for 2004 in billions of dollars. Be sure to get the correct year, and annual data, not quarterly.

    Visit the BEA’s net international investment position data page and obtain the U.S. net international investment position for end 2003 to end 2004.

    • What was the U.S. current account for 2004?
    • What was the U.S. financial account for 2004?
    • What was the U.S. change in external wealth for 2004?
    • What was the U.S. total valuation effect for 2004?
    • Does the answer to part (d) equal the answer to part (e) minus the answer to part (c)? Why?
    • What do the BEA data indicate was the U.S. valuation effect due to exchange rate changes for 2004?
      You may now assume that the U.S. dollar depreciated by 10% against major currencies in 2004, and use this average to estimate valuation effects.
    • What were end-2003 U.S. external liabilities? If 5% of these liabilities were in foreign currency and were subject to a 10% exchange rate appreciation, what decrease in U.S. external wealth resulted?
    • What were end-2003 U.S. external assets? If 65% of these assets were subject to a 10% exchange rate appreciation, what increase in U.S. external wealth resulted?
    • Using the answers to parts (g) and (h), what was the 2004 U.S. valuation effect due to exchange rate changes according to your rough calculation? Is it close to the BEA figure in part (f)?