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Consider the economy of Tweet. In Tweet, domestic investment is $300 million and its residents earned...

Consider the economy of Tweet. In Tweet, domestic investment is $300 million and its residents earned $10 million in capital gains during 2006. Residents of Tweet purchased $150 million in new foreign assets during the year and foreigners purchased $120 million in Tweet assets. Assume the valuation effects total $1 million in capital gains. a. Calculate the change in domestic wealth in Tweet. Assume KA=0. b. Calculate the change in external wealth for Tweet. c. Calculate the total change in wealth for Tweet. d. Calculate domestic savings for Tweet. e. Calculate Tweet’ current account. Is the CA in deficit or surplus?

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Answer #1

A. Change in domestic wealth = sum of additions to the capital stock plus capital gains earned on domestic assets

$300 + $10 = $310

B. Change in in external wealth = - Financial account + capital gains

-($150-$120)+$1 = -$ 29

C Total change in wealth = change in domestic wealth - change in external wealth= $310- $29= $281

D. Domestic savings = $281 - ($10+$1)= $270

E. Current account = Domestic Investment - Domestic savings

$300- $270= $30

F. Defocit

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