Question

Suppose that at the end of 2012, the value of U.S.-owned assets abroad is $15,888 billion, and the value of foreign-owned assets in the United States (which are U.S. liabilities) is $16,953 billion. The net international investment position of the United States in 2012 isbillion. (Hint: Be sure to include a negative sign if the U.S. is experiencing debt.) Suppose that in 2013, the United States runs a current account surplus of $514 billion. If other factors remained constant, the net international investment position of the United States would during 2013 to $ billion Suppose that during 2013, the U.S. net external debt decreases by $393 billion from the previous year. Given the current account balance, which of the following can explain this outcome? Check all that apply. Foreign-owned assets in the United States appreciated (gained value). The net borrowing of the United States was greater than its current account deficit. U.S.-owned assets held abroad depreciated (lost value). The U.S. current account deficit was greater than the country's net borrowing.

Answer 1

Net International Investment Position (NIIP) is known as the nation's stock of foreign assets (FA) minus the foreign liabilities (FL) it holds. NIIP thus is a kind of balance sheet of a nation with the rest of the world at a specific point in time.

∴ NIIP= FA-FL

Now,

• In the question given, at the end of 2012,

US owned assets abroad (FA) = $15,888 Bn

Foreign owned assets in the US (FL)= $16,953 Bn

∴Net International Investment Position (NIIP)= $15,888 Bn- $16,953 Bn

(NIIP)= (-) $1,065

• In 2013 the current account surplus of US is $514 Bn

Net international investment position in 2013= NIIP in 2012 + Current account surplus in 2013

∴Net International Investment Position (NIIP) 2013= (-) 1,065 + 514 = (-) $551

Therefore, the NIIP in 2013 would fall to $551.

• As the current account deficit of the year 2013 reduces by only $393 Bn with respect to the year 2012 (-1065), the Given current account balance turns out to be negative.

A given current account balance is negative only when the nations spends more than it has. From the given options, only 3 and 4 are correct.

According to 3 when the US owned assets held abroad depreciate, it means that the value of those assets fall and hence the value of NIIP also falls and thus the net external debt also decreases.  

According to 4, the borrowing of the US are less than the deficit it faces. This means it is spending more than it has and thus the net external debt also decreases.

All the other given options lead to the increase in net external debt rather than fall in the debt.