Question

5. Assume that the following numbers are true for the current account between the US and Switzerland: Exports of goods and services to Switzerland: 1.2 Billion Imports of goods and services from Switzerland: 3.1 Billion Income on US investments in Switzerland: .5 Billion Income on Swiss investments in the US: .8 Billion

a) Based on these numbers, explain what the Financial account balance should be between the US and Switzerland. (2 points)

b) Assume that, at this moment, the Financial account balance with Switzerland is +1.5 Billion. Draw a diagram of the market for USD vs.CHF where the quantity is in dollars traded and the price is in CHF/USD. Use the drawing to explain how the exchange market would react to this imbalance and how that reaction would put the situation back in balance. Draw a market with the quantity of CHF and the price is USD/CHF and show how you get the same result. (3 points)

Answer 1

a). Balance of payment on current account = Export of goods & services - Imports of goods & services.

= 1.2 Billion - 3.1 Billion.

= (-) 1.9 Billion.

Balance of payment on capital account = Autonomous capital receipts - Autonomous capital payment.

= 0.5 Billion - 0.80 Billion

= (-) 0.3 Billion.

Financial account balance = Balance of payment on capital account + Balance of payment on current account.

= (-) 0.3 Billion + (-) 1.9 Billion

= (-) 2.2 Billion.

Conclusion :- Financial account balance = (-) 2.20 Billion.