Question

In 2010, Country A's GNP is $25’000

Consumption is $5’000

Investment is $12’000

and Government Spending is $3’000

1. What is the current account balance?

2. Suppose that the trade balance is 0; what is the balance of {Export of Services - Imports of Services +Income Receipts - Income Payments + Net Gifts?}

3. Net financial assets must be flowing to Country A: true or false?

In 2010, Country A's GNP is $25’000

Consumption is $5’000

Investment is $12’000

The current account balance is $2’000

1. What is government spending?

2. Suppose that the trade balance is $1000; what is the balance of {Export of Services - Imports of Services +Income Receipts - Income Payments + Net Gifts?}

3. Suppose that the the balance of {Export of Services - Imports of Services +Income Receipts - Income Payments + Net Gifts} is 0. What is the trade balance?

Answer 1

1) Current account balance = (X - M) + NY + NCT

where X = export ; M= import ; NY = net income from abroad ; NCT = net current transfers .

GNP = GDP + Net income inflow from abroad – Net income outflow to foreign countries

Therefore ,  Net income inflow from abroad – Net income outflow to foreign countries = GNP - GDP = 25,000 - ( C+I+G ) = 25,000 - (Consumption is $5’000+Investment is $12’000+and Government Spending is $3’000)

= 25,000 - 20,000 = 5,000 $

Current Account balance = 5,000$

2) Trade balance = export - import = 0

Therefore balance of Export of Services - Imports of Services +Income Receipts - Income Payments + Net Gifts = current account balance = 5000$

3) Net financial assets = current account deficit or surplus . Here current account is positive . So Country A has lent to abroad . FALSE