Question

Consider the following table which shows the balance-of-payments for a country. Figures are in billions.

Goods Exports                                                +80

Goods Imports                                    -60

Service Exports                                  +30

Service Imports                                   -20

Net Investment Income                      -10

Net Transfers                                      +20

Balance on Capital Account              0

Foreign Purchases of Domestic Assets           +40

Domestic Purchases of Foreign Assets           -80

Calculate the following:

a. Balance on goods.

b. Balance on goods and services.

c. Balance on current account.

d. Balance on capital and financial account.

e. Suppose that this country sold $20 billion of official reserves abroad to balance the capital and financial account with the current account. Is there a balance-of-payments deficit or a surplus?

Answer 1

(a) The Balance of goods is given by= Exports of goods - Imports of goods

= 80 - 60 = 20 billion

(b) The Balance on goods and services is given by = Exports of goods - Imports of goods + Exports of services - Imports of services

= 80 - 60 + 30 - 20 = 30 billion

(c) The balance on current account is given by = Balance on goods and services + Net Investment Income + Net Transfers   

= 30 - 10 + 20 = 40 billion

(d) The Balance on capital and financial account is given by= Balance on Capital Account + Foreign Purchases of Domestic Assets - Domestic Purchases of Foreign Assets

= 0 + 40 - 80

= -40 billion

(e) there is a balance of payment surplus as balance of payment = Balance on current account + Balance on capital and financial account.

Initial BOP = 40 - 40 =0

After 20 billion reserves is sold,

New BOP = 60 - 40 = 20 billion that is positive, hence surplus