# ans1 - Department of Economics University of California,...

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Department of Economics University of California, Berkeley Spring 2006 Economics 182 Suggested Solutions to Problem Set 1 Problem 1: National income accounts Using the national income identity we replace the known values to ﬁnd the unknown variables: Y = C + I + G + EX - IM + NFP 100 = 70 + 40 + 20 + 20 - IM + 0 IM = 50 CA = EX - IM + NFP CA = 20 - 50 + 0 CA = –30 We ﬁnd that imports total 50 and that there is a current account deﬁcit of 30, that is, the country is a net borrower from the rest of the world. In open economies, savings equals investment plus the current account balance. The savings rate is then calculated by dividing savings by output. Replacing we have, S = I + CA S = 40 - 30 S = 10 s S Y = 10% If we breakdown savings into private and government savings and use T=10 we have S p = Y - T - C S p = 20 s p = 20% S g = T - G S g = - 10 s g = –10% S = S p + S g S = 10 s = 10% Problem 2: BoP transactions Recall that every export of a good, service or asset (ﬁnancial or cash) enters the balance of payments accounts with a positive sign (+), counting as a credit. Likewise, every import of a good, service, or asset (ﬁnancial or cash) enters the balance of payments with a negative sign (–), counting as a debit. (a) Purchase of Portuguese stock: U.S. asset import – debit in the ﬁnancial account. Paying via a wire transfer from Wells Fargo to a Portuguese bank: U.S. asset export – credit in the ﬁnancial account. (b) U.S. company earnings abroad that are not repatriated are credited to the U.S. investment income account. They do not actually have to cross a border. And 1

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ﬁrms do have to report these earnings to the U.S. government, so they are ob- served. They enter the current account with a positive sign, as a credit. The purchase of the machine would enter the ﬁnancial account under foreign di- rect investment (as a debit since it is an acquisition of an asset located abroad), because the U.S. company is expanding its foreign holdings of capital. (c) Car rental: U.S. service export – credit in the current account. Purchase of claim on Australian credit card: U.S. asset import – debit in the ﬁnancial account. Problem 3: BoP identity Yes, it is possible for a country to have a current account surplus and a balance of payments deﬁcit. Recall that CA + KA + NRFA + SD = OSB where CA is the current account surplus, KA is the capital account balance, NRFA is the non-reserve portion of the ﬁnancial account balance, SD is the statistical discrep- ancy, and OSB is the oﬃcial settlements balance or the balance of payments. Therefore, if a country is running a current account surplus of, say, \$100 billion but there is a non- reserve ﬁnancial account deﬁcit of \$150 billion, then the balance of payments has a \$50 billion deﬁcit. The situation described above could happen in a country undergoing an economic
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## This note was uploaded on 08/01/2008 for the course ECON 182 taught by Professor Kasa during the Spring '08 term at Berkeley.

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ans1 - Department of Economics University of California,...

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