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.

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The following text is written below the previous one: TB equals 600 dollars.

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There are no unilateral transfers.

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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.

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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.

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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.

Work It Out, Chapter 16, Question 2

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
Question (b) will ask you to compute the official settlements balance (OSB) and to explain what happened to the central bank’s foreign reserves. We start with the financial account identity. The financial account equals the sum of the official settlements balance and the nonreserve financial account.

(Description)
The following relation is written: FA equals OSB plus NFA.

(Speaker)
We plug in the known values. The financial account (850 million dollars) was computed above, and the nonreserve financial account was given at 700 million dollars.

(Description)
The following relation is written below the previous one: 850 dollars equals OSB plus 700 dollars.

(Speaker)
To separate the official settlements balance we move the 700 million dollars to the other side and change the sign.

(Description)
The following relation is written below the previous one: OSB equals 850 dollars minus 700 dollars.

(Speaker)
After deducting 700 from 850, we obtain 150 million dollars.

(Description)
The following relation is written below the previous one: OSB equals 150 dollars.

(Speaker)
This means that foreign central banks purchased more Ikonomian assets (paid for with foreign currency) than the Ikonomian central bank purchased foreign assets (paid for with domestic currency, U.S. dollars in this case). Therefore, Ikonomia’s central bank experienced an increase in its foreign reserve holdings.

Work It Out, Chapter 16, Question 3

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
Question (c) will ask how much income the foreign factors of production earned in Ikonomia during 2016. We start with the identity for net factor income from abroad, NFIA. The net factor income from abroad equals the sum of earnings of Ikonomian factors abroad EXFS and earnings by foreign factors located in Ikonomia IMFS.

(Description)
The following relation is written: NFIA equals EX subscript FS plus IM subscript FS.

(Speaker)
Since we do not know the value of the net factors income from abroad NFIA, we have to find it. We refer to the current account (CA) identity which is the sum of the trade balance TB, net factor income from abroad NFIA, and net unilateral transfers NUT.

(Description)
The following relation is written below the previous one: CA equals TB plus NFIA plus NUT.

(Speaker)
The current account is given at negative 1000 million dollars. The trade balance is also given at negative 800 million dollars. And the net unilateral transfers was given at 0. Separating, we find out that the net factors income from abroad NFIA is negative 400 million dollars.

(Description)
The following relations are written below the previous ones: 1000 dollars equals negative 600 dollars plus NFIA plus zero. NFIA equals negative 1000 dollars plus 600 dollars plus zero equals negative 400 dollars.

Work It Out, Chapter 16, Question 4

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
Question (d) will ask you to compute the net factor income from abroad (NFIA). The net factor income from abroad (NFIA) was an intermediary result obtain in part (c). There NFIA equals negative 400 million dollars.

(Description)
The following relation is written: NFIA equals negative 400 dollars.

Work It Out, Chapter 16, Question 5

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
Question (e) will ask you to show that the balance of payments BOP equals 0 using the identity BOP equals Current account (CA) plus financial account (FA) plus capital account (KA). We start with the balance of payment identity.

(Description)
The following relation is written: BOP equals CA plus FA plus KA.

(Speaker)
Then we expand the identity, observing that the current account is the sum of the trade balance, net factor income from abroad, and net unilateral transfers.

(Description)
The following relation is written below the previous one: BOP equals the sum of TB, NFIA, and NUT, plus FA plus KA.

(Speaker)
Finally, we plug in the values for TB, NFIA, NUT, FA, and KA and via computing obtain a zero, as expected.

(Description)
The following relation is written below the previous one: BOP equals the sum of negative 600 dollars, negative 400 dollars, and zero, plus 850 dollars plus 150 dollars equals negative 1000 dollars plus 1000 dollars equals 0.

Work It Out, Chapter 16, Question 6

(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)

(Speaker)
Question (f) will ask you to compute Ikonomia’s gross national expenditure (GNE), gross national income (GNI), and gross national disposable income (GNDI). We start with the identity for GNE. We know that GNE equals GDP less the trade balance.

(Description)
The following relation is written: GNE equals GDP minus TB.

(Speaker)
Plugging in the known values, we find that the value of the GNE for the year 2016 is 8.8 billion dollars.

(Description)
The following relation is written below the previous one: GNE equals 9400 dollars minus negative 600 dollars equals 10000 dollars.

(Speaker)
We start with the identity for GNI. We know that GNI equals GDP plus the net factor income from abroad NFIA.

(Description)
The following relation is written: GNI equals GDP plus NFIA.

(Speaker)
Plugging in the known values, we find that the value of GNI for the year 2016 is 9.0 billion dollars.

(Description)
The following relation is written below the previous one: GNI equals 9400 dollars plus negative 400 dollars equals 9000 dollars.

(Speaker)
We start with the identity for GNDI. We know that GNDI equals GDP plus the net factor income from abroad NFIA plus net unilateral transfers, or GNI plus NUT.

(Description)
The following relation is written: GNDI equals GDP plus NFIA plus NUT equals GNI plus NUT.

(Speaker)
Plugging in the known values, we find that the value of the GNDI for the year 2016 is 9.0 billion dollars.

(Description)
The following relation is written below the previous one: GNDI equals 9000 dollars plus zero equals 9000 dollars.

(Speaker)
GNDI and GNI are equal since there are no transfer payments.