HW 3 - Economics 115B Dr. Janine L.F. Wilson Homework #3...

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Unformatted text preview: Economics 115B Dr. Janine L.F. Wilson Homework #3 Balance of Payments and Debt 1. Assume that there exists a developing country called Audland. In Audland, over the last 10 years, the government has been encouraging economic growth through the development of various capital intensive industries. They have been imporf,ing oapital and intermediate goods from abroad and have accumulated a foreign debt of $10 billion as of the end of last year. This year in Audland they have imported goods worth $2 billion, exported goods worth $500 million, received $2 billion in new loans from abroad, lost $1.2 biltion in domestic capital that was sent abroad "capital flight", paid the interest payment on their debt which was $750 millioir, received $500 million in foreign direct investment, received $250 million in foreign portfolio investment and received $500 million in net remittances. a. What is the current account balance in Audland? Exports [+0.5BI - Imports [-2Bl + Net Investment Income (Earned income on investments-interest payments to foreigners on domestic investment)[0]-debt service payments (interest and dividends on debt issues) [-0.7581+Net Remittances and Transfers (people working abroad sending income home) [+0.5B] = -1.758 is the current account balance. b. What is the capital account balance in Audland? (Show your work, giving the details ofeach step) *Direct Private Investments (FDI, Multinationals building locally, this includes foreign portfolio investments which are basicalty just investing in the stock market) [+0.5B+0.2581+New Foreign Loans (Foreign aid and loans from private banks)[+2B] - increase in foreign assets of domestic banking system (foreigners putting money in the country's bank)[0]-residential capital outflow (Capital Flight) [-1.281 = 1.558 is the capital account balance. c. How is the difference between parts a. and b. rectified given that we know that the balance of payments must be in balance? (equal zero) Where is the money coming from? There is a movement of 0.2B out of the cash account to offset this difference. d. What is the "basic transfer"? (This comes from a formula, not just a change in foreign reserves, show your work, giving the details of each step) Economics 1158 Dr. Janine L.F. Wilson Basic transfer =(d+r)D, this is just dD-rD which is the new loans - payments on loans where D is total loans, d is 7o rate of increase in debto r is the interest rate on debt. So here it is new loans - interest payments = 2B-0.75B, so there is an increase in foreign exchange. e. Now, assume that next year the loans that Audland owes to commercial banks have an interest rate adjustment which increases annual interest payments on debt to $3 billion. If next year's new loans totaled $2 billion, what would be next year's "basic transfer" amount? (This comes from a formula, not just a change in foreign reserves, show your work) The new loans would be $2B and the interest payment is $3B, so we get 2B-38= -lB so a decrease in foreign exchange.so a decrease in foreign exchange....
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HW 3 - Economics 115B Dr. Janine L.F. Wilson Homework #3...

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