Question

In the economy of Scottopia in 2010, exports equaled $400 billion of goods and $300 billion of services, imports equaled $500 billion of goods and $350 billion of services, and the rest of the world purchased $250 billion of Scottopia’s assets. What was the merchandise trade balance for Scottopia? What was the balance of payments on current account in Scottopia? What was the balance of payments on financial account? What was the value of Scottopia’s purchases of assets from the rest of the world?

Answer 1

Solution

For the economy of Scottopia :

Export of Goods: $400 billion

Export of Services: $300 billion

Import of Goods: $500 billion

Import of Services: $350 billion

Rest of the World purchased Scottpia assets: $250 billion

(a)

Merchandise trade balance for Scottopia = Export of Goods - Import of Goods

= $(400 - 500) billion

= - $100 billion

(b)

Balance of Payment of Current account in Scottopia

= (Volume of Export of goods and services - Volume of Import of goods and services)

= $(400+300) - (500+350)billion

= $(700 - 850)billion

= -$150 billion

(c)

Since Balance of current account + Balance of Financial account must be equal to ZERO

Balance of Payment = Balance of current account + Balance of Capital account + Balance of Financial account

Assuming BOP = 0 and Balance on capital account = 0 , we get

0 = (-150) + 0 + Balance of Financial account

Balance of Financial account = $150 billion

(d)

Since the balance of payments on financial account in Scottopia is equal to $150 billion

If the rest of the world bought $250 billion of Scottopia’s assets, Scottopia must have bought $100 billion of assets from the rest of the world.