Lesson 1

Question 1

What is included in the Current Account?

Answer 1

Typically Considered NX

Exports and imports of goods and services

Earned income flows (also called primary income)

Income transfers (also called secondary income)

Question 2

What is included in the Capital Account?

Answer 2

One sided transfers of assets to Canada from ROW (receipts/credits) and from Canada to ROW (payments/debits).

Examples include: migrants’ funds, inheritances, and debt forgiveness by the Government of Canada.

Question 3

What is included in the Financial Account?

Answer 3

FA is the difference between 
total sales (exports) by Canadians of both Canadian- and foreign-issued financial assets to ROW, 
and total purchases (imports) by Canadians of both foreign- and Canadian-issued financial assets from ROW.

Question 4

What is the fundamental balance of payments identity?

Answer 4

current account balance (CA) +
capital account balance (KA) +
financial account balance (FA) = 0

Question 5

In a particular year, the net value of official reserve transactions amounts to +$5 billion. What was the official settlements balance for this country (in billions)?

Answer 5

-5 billion

Question 6

What is net foreign wealth? [Net International Investment Position]

Answer 6

Net foreign wealth = Foreign assets − Foreign liabilities

Question 7

What are the two ways to change net foreign wealth?

Answer 7

Current account imbalances and net capital flows
CA surplus results in a net capital outflow from Canada (net foreign lending) and an increase in Canada’s net foreign wealth:
CA > 0 → net capital outflow→⇧ net foreign wealth
Current account deficit results in a net capital inflow to Canada (net foreign borrowing) and a decrease in Canada’s net foreign wealth:
CA < 0 → net capital inflow →⇩ net foreign wealth

Valuation effects.
Net foreign wealth will also change when there are capital gains and losses due to price effects. For example, foreign holders of Japanese shares suffered capital losses when Japan’s stock market crashed in the 1990s.
Changes in exchange rates can change the domestic-currency valuation of those foreign assets and liabilities denominated in foreign currencies. For example an appreciation of the euro against the Canadian dollar would result in dollar capital gains for Canadians owning euro-denominated assets.

Question 8

What is the GNP equation?

Answer 8

GNP = GDP + Net income from ROW

Question 9

What is absorption?

Answer 9

Total spending by domestic buyers on both domestically-produced and imported goods and services (C + I + G)

Question 10

What is the trade balance?

Answer 10

NX = Q –(C + I + G)

Question 11

What does CA mean in the equation for demand?

Answer 11

CA = NX + net income from ROW

Also…
CA = Y - A
CA = Y - (C + I + G)

Question 12

Current Account Surplus

Answer 12

A country which “earns more than its spends” will have a current account surplus and net foreign wealth will (other things equal) increase:
Y > A → CA > 0 →⇧ net foreign wealth

Question 13

Current Account Deficit

Answer 13

A country “which spends more than it earns” will have a current account deficit and net foreign wealth will (other things equal) decrease:
Y < A → CA < 0 → ⇩ net foreign wealth

Question 14

Zero Current Account

Answer 14

A country which “spends only what it earns” will have a zero current balance and net foreign wealth will (other things equal) be stable:
Y = A → CA = 0 → net foreign wealth⇨

Question 15

How/Is the CA related to Savings?

Answer 15

Current account balance = national saving – investment

National Saving = Y - C - G

Question 16

Consider a hypothetical economy in which: Y = $1,000 b; C= $600 b; T = $180 b; I = $200 b and G = $210 b. Use these figures to calculate private, government, and national saving for this economy.

Answer 16

-10 Billion