Question

Balance of Payments Worksheet

Part A:

Reason for Money Received	Inflow Amount (+)	Account
Exports of goods and services	$1287	Current
Income receipts from domestically-owned assets abroad (receive profits, interest etc.)	$537
Inward direct investment	$112	Capital & Financial (C&F)
Foreign (private and government) purchasing of domestic securities (stocks, bonds, etc.)	$862
Increase of foreign deposits in domestic financial institutions (banks etc.)	$310
Total incoming money flows	$3108

Reason for Money Paid or Given Out	Outflow Amount (−)	Account
Imports of goods and services	$1996	Current
Income payments to foreign-owned assets in the domestic country (pay profits, interest etc.)	$454
Net unilateral transfers: grants and private-sector (usually family) remittances*	$105
Outward direct investment	$36	Capital & Financial (C&F)
Domestic (private and government) purchasing of foreign securities (stocks, bonds, etc.)	$251
Increase of domestic deposits in foreign financial institutions (banks etc.)	$266
Total outgoing money flows	$3108

*Unilateral transfers are treated as a net number. If the country has net unilateral outflows, it goes on the second table. If the country has net unilateral inflows, it goes on the first table.

Financial capital in a country sloshes around in a pool. The funds going into the financial pool add to the level of the pool and funds withdrawn from the financial pool subtract from the level of the pool. But funds added to and subtracted from the pool at the same time don’t have to be (and rarely are) the same dollars.

1. Suppose a domestic country’s private borrowing equals its private saving, so its net private borrowing (and net private saving) is zero. The domestic country’s government is running a budget deficit.

(a) Which does the domestic country do, lend to foreign countries or borrow from foreign countries?

(b) Which does the domestic country have, a capital and financial (C&F) account surplus or a C&F account deficit?

(c) Which does the domestic country have, a trade surplus or trade deficit?

2. Suppose a domestic country’s private borrowing equals its private saving. The domestic country’s government is running a budget surplus.

(a) Which does the domestic country do, lend to foreign countries or borrow from foreign countries?

(b) Which does the domestic country have, a C&F account surplus or a C&F account deficit?

(c) Which does the domestic country have, a trade surplus or trade deficit?

Answer 1