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?
(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
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