Question

Can someone please help me solve this?

Question 3) Use the following data on the hypothetical economy to answer the following questions: CA:$5000 million KA: $100 million NUT:$50 million TB: $800 million C: $3000 million G: $1000 million GNE: $7000 million What is the financial account balance in this country? Do foreign purchases of domestic assets exceed domestic purchases of foreign assets? а. b. Calculate net factor income from abroad. C. Is this country a net lender or net borrower? Explain how you arrived to this conclusion d.

Answer 1

Answer:-

CA= Current Account = $ 5000 million
KA = Capital account = $ 100 million
NUT = Net unilateral transfers = Income Transfers = $ 50 million
TB= Trade balance = Exports - Imports = $ 800 million
C = Consumption = $ 3000 million
G = Government consumption and Government investment expenditure = $ 1000 million
GNE = Gross National Expenditure = $ 7000 million

GNE = C+I+G
$ 7000 m= $ 3000 m+ I + $ 1000 m
Investment (I) = $ 7000 - $ 3000 - $ 1000
Investment (I) = $ 3000

GDP = GNE + TB
GDP = $ 7000 + $ 800
GDP = $ 7800
GNDI = GNI + NUT
GNDI + GNE + CA
GNDI = $ 7000 m + $ 5000 m = $ 12000 million ( Gross national disposable income)

GNDI =GNI + NUT
GNI = GNDI - NUT
GNI = $ 12000 - $ 50
GNI = $ 11950

a)

The financial account balance in the country (FA)

Because of the balance of payments (BOP)
CA + KA + FA = 0
$ 5000 m+ $100 m + FA = 0
FA = - $ 5100 million
Therefore the financial account balance in the country = - $ 5100 million

b)

Exports – imports = (domestic purchases of foreign assets) – (foreign purchases of domestic assets)

Exports - Imports = $ 800
Since in the above equation the amount is positive ( $ 800) therefore foreign purchases of domestic assets does not exceed the domestic purchases of foreign assets

c)

Net factor income from abroad (NFIA)

CA = TB + NFIA + NUT
$ 5000 = $ 800 + NFIA + $ 50
NFIA = $ 5000 - $ 800 - $ 50
NFIA = $ 4150

d)

Is the country a net lender or a borrower?

The total Current account and Capital account balances of the country decides whether a country is a borrower or a lender. If it is positive then the country can lend to the rest of the world and if it is negative it is a net borrower ie. it borrows from the res of world.

CA + KA = $ 5000 + $ 100 = $ 5100
Since this is positive the country can lend to the rest of the world and is a net lender.