ECMC61_Assignment_1_Solution_%28Summer_2010%29

ECMC61_Assignment_1_Solution_%28Summer_2010%29 - ECMC61...

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ECMC61 – International Economics: Finance Assignment 1 Answer Key (Summer 2010) Question 1 (20 points) Part (a) (15 points) X Y Z Gross domestic product, GDP 9000 10000 1 8500 Consumption, C 5040 1 5600 4760 1 Investment, I 1350 9 1445 9 1445 15 Government spending, G 2550 3 4400 910 3 Taxes, T 3000 2 4120 3 910 4 Exports of goods and services, EX 2700 6 2718 8 4163 16 Imports of goods and services, IM 2640 8 4163 2778 8 Private saving, S P 960 4 280 4 2830 Public saving, S G 450 3 – 280 3 0 5 National saving, S 1410 5 0 5 2830 5 Net unilateral transfer 0 0 0 Current account, CA 60 10 – 1445 1385 12 Sales of country’s financial assets to foreign residents 1973 2437 13 1375 19 Purchases of foreign financial assets by domestic residents 1958 13 1545 14 2282 13 Official reserve transactions, ORT 0 7 428 18 – 428 17 Financial account, KA 15 1320 7 – 1335 7 Capital account – 75 7, 11 125 11 – 50 11 Grading: 0.5 point will be subtracted for each mistake. The superscripts attached to the answers only aim at providing explanations on how to get the answers; however, the order of filling in the table does not necessary follow the number given to the explanation. For example, you may have to solve for “ORT” for X before solving for “Sales of foreign financial assets by domestic residents” for X. There are more than one way to get the answers, and I am only showing you one. However, it does not matter which way you use, the answers are the same. Explanation: 1) C = 0.56GDP GDP = C/0.56. 2) T = GDP. 3) S G = T – G (budget deficit implies S G < 0, budget surplus implies S G > 0, & balanced budget implies S G = 0). 4) S P = GDP – C – T. 5) S = GDP – C – G or S = S P + S G or S = I + CA. 6) EX = 0.3Y 7) BOP identity: CA + KA + Capital Account = 0 CA + KA non-res + Capital account = – ORT BOP = – ORT. ECMC61 Assignment 1 Answer Key (Summer 2010) 1
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8) CA = EX – IM + Net unilateral transfer. 9) Y = C + I + G + CA. 10) X’s overall trade balance = X’s trade balance with Y + X’s trade balance with Z. 11) Given in the question. Since residents of X and Z pay out asset transfers of 75 and 50 to residents of Y respectively, X and Z are making payment to Y there will debit entry for X and Z and credit entry for Y under Capital Account (because no market transactions are involved in these asset transfers) see page 306 of text. 12) Sum of all countries’ CA must equal to 0, i.e., CA X + CA Y + CA Z = 0. 13) KA = KA non-res + ORT = [Sales/exports of country’s financial assets to foreign residents – Purchases/imports of foreign financial assets by domestic residents] + ORT. 14) Given in the question.
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ECMC61_Assignment_1_Solution_%28Summer_2010%29 - ECMC61...

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