Question

In 2017 the economy of Eastovia, Eastovians purchased $400 billion of assets from the rest of the world and sold $450 billion of assets to the rest of the world. a) What was Eastovia’s balance of payments on financial account for 2017? b) What was the balance of payments on current account? c) If Eastovian’s earned $50 billion in factor income from the rest of the world, and received $50 billion in transfers from the rest of the world, what was the balance of trade on goods and services? Explain.

Answer 1

(a) Financial account balance ($ Billion) = Assets sold to rest of world - Assets purchased = 450 - 400 = 50 (Surplus)

(b) Current account balance ($ Billion) = - Financial account balance = - 50 (Deficit)

(c) Current account balance = Balance of trade in goods and services + Factor income received from abroad + Transfer receipt

Balance of trade in goods and services ($ Billion) = Current account balance - Factor income received from abroad - Transfer receipt

= - 50 - 50 - 50

= - 150