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Unformatted text preview: Practice Problems on Current Account 1- List de categories of credit items and debit items that appear in a country’s current account. What is the current account balance? What is the relationship between the current account balance and next exports? Credit items in the current account are exports of goods and services and income receipts from abroad. Debit items in the current account are imports of goods and services, income payments to foreigners, and net unilateral transfers. Adding all of the credit items and subtracting all of the debit items gives the current account balance. The current account balance equals net exports plus net factor payment plus net unilateral transfers. 2- What is the key difference that determines whether an international transaction appears in the current account or the capital and financial account? The current account includes only the trade of currently produce goods and services. Trades of existing assets are counted in the capital and financial account. 3- An American publisher sells $200 worth of books to a resident of Brazil. By itself, this item is a credit item in the U.S. current account. Describe some offsetting transactions that could ensure that the U.S. current account and the capital and financial account balances would continue to sum to zero. The sale of books from United States to Brazil is a credit item in U.S. current account. Offsetting transactions include anything that is a debit item in either the current account or the capital and financial account. Some examples of offsetting transactions are: (1) A U.S. citizen buys $200 worth of stock in a Brazilian company, so that the offsetting debit item is an increase in U.S. –owned assets abroad, which is a debit in the capital and financial account. (2) A U.S firms imports $200 worth of nuts from Brazil, so the offsetting debit item is an import of goods, which is a debit in the current account. 4- How do a country’s current account, capital account and financial account balances affect its net foreign assets? If country A has greater net foreign assets per citizen than does country B, is country A necessarily better off than country B? In any period, the net amount of new foreign assets that a country acquires equals its current account surplus, which in turn must equal its capital and financial account deficit. A country with greater net foreign assets than another is not necessarily better off. What really counts is total national wealth, which consists of both net foreign assets and net domestic assets. For example, the United States has lower net foreign assets than other countries, but has one of the world’s highest levels of total national wealth per citizen....
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This note was uploaded on 10/25/2010 for the course MBA GloEco taught by Professor N.m. during the Spring '10 term at Institute of Business Administration.
- Spring '10