Question

Ritania is calculating its balance of payments for the year. All transactions for the year are listed below (all amounts are expressed in US dollars).

1. Ritania received weapons worth $200 from the US under its military program; no payment is necessary.
2. A Ritanian firm exported $400 of cloth.
3. A Ritanian resident is paid $10 in interest on a loan to a foreigner.
4. Foreign tourists visited Ruritania and spent $100 in traveler’s checks.
5. Ritanian investors invested $200 overseas and received $50 in interest on the investment that same year.
6. A Japanese construction firm received a $150 installment payment for work done in Ruritania.
   1. Calculate Ritania’s current account (CA) and Financial Account (FA) balances. Briefly (in one, very short sentence) interpret the CA balance.
   2. What change in the official reserve (OR) account is implied such that the balance of payments balances? Interpret (in one, very short sentence) this change.

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Answer 1

Current Account Balances = (X-M) + NI + NT

X is the export of goods and M is the import of goods

NI is the net income

NT is the net current transfers.

Particulars	Amount ($)
Export	400
Less: Import	-200
Net Income (-10+50)	40
net current transfers (10+100)	110
Current Account Transfer	350

Financial account is a component of a country’s balance of payments that covers claims on or liabilities to non-residents, specifically about financial assets. Financial account components include direct investment, portfolio investment and reserve assets broken down by sector.

There Would be change of 350$ in Official reserve Account which is implied such that balance of account balances.

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