Copy of Balance of Payments Dropbox Assignment (1)

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Unit 5: Balance of Payments Assignment: To make sure that you understand the components of the current account and the capital account, complete the following assignment. When you have completed the assignment submit to the Unit 5: Balance of Payments Dropbox. Which component of the balance of payments accounts is affected by the following economic developments? Make sure to explain your answers for each. 1. A U.S. company sells a brand new airplane to an Australian airline. Current account, the U.S. is trading goods and services with Australia. 2. German investors buy stocks in an American parcel shipping service. Financial Account, stocks are a direct investment, that is included in a financial account. 3. South Vietnam purchases from the United States a fleet of used machines for chewing up old asphalt when resurfacing roads. The United States ships the entire fleet to South Vietnam. Current account, this is a trade between goods and services between South Vietnam and the United States. 4. A Russian oligarch who owns homes in the United States buys a luxury corporate yacht, which he keeps in the United States. Financial account, the Russian oligarch is buying a direct investment in The U.S. 5. The Amazon Basin floods for nearly a week, causing massive loss of property, record breaking damages, and several hundred deaths. The U.S. government approves sending a foreign aid package to help the worst hit countries: Peru, Bolivia, and Brazil. Current account, The United States is transferring money to the countries that need foreign aid.

Assume there are only two countries, country C and country J. 6. If country C is running a current account surplus, what must be true of Country J's financial account? Explain. Country J will be in a financial account surplus because the trade balance generally has the largest impact on the current account balance, which will cause a current account deficit in country J. 7. Draw a graph of the loanable funds market in country J and show how an increase in Country C's current account surplus affects the supply of loanable funds and the equilibrium interest rate. Make sure you label all axes and curves. 8. When talking about the current account and the capital account it is important to remember that they are two separate entities, but economists say that they must balance. In your own words, explain what each account measures and why they must net zero. Use the example of a country with a trade imbalance. Current account measures a country's interaction with the rest of the world. The main three transactions are net trade of goods and services, foreign investments, and net transfer payments. On the other hand, a financial account measures a country's ownership of foreign assets such as direct investment from other countries. The current account plus the financial account will always equal zero because the money that leaves the economy

will come back. If the US increases imports, those imports will count as a debit in the US current account. The US dollars used to pay for the imports must come back to the US economy. They will be used to purchase American assets. That creates a credit in the US financial account equal to the debit in the current account; bringing the accounts back into balance. 9. Let’s say that a country has experienced current account surpluses for several years in a row. What could be the main causes of these surpluses and is it desirable to have continuous current account surpluses year after year? A change in demand and supply can cause a current account surplus. High incomes abroad as well as low incomes at home will cause a change in demand, leading to a current account surplus. Low relative inflation, strong investment, new technology, or low labor cost change supply and cause a current account surplus. A current account surplus implies a higher inflow than an outflow. This will eventually have negative effects such as a risk of seeing the value of the currency fall. Also, the nation becomes dependent on the value of the foreign assets, which will cause the whole nation to suffer in the situation of negative price variation in whole investment. 10. Assume a business organization in Ireland invests in a foreign based company. Is this transaction a debit or a credit for Ireland and what account within the balance of payments is it a part of? This is a financial account because it is a foreign investment. For Ireland this will be a debit transaction because it is increasing assets.

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