Topic 3: Balance of Payments

Question 1

Outline the BOP equation.

Show how exports, purchasing of foriegn assets effect this.

Answer 1

CA + KA = 0

Inc. Exports => CA++

Inc. Purchase of foriegn assets => KA –

KA is a measure of capital flows, where positive is into the country.

CA is a measure of good flows, where positive is out of the country.

Question 2

Components of the current acount

Answer 2

Exports - Imports + Net inflows to households + Net gifts to househoulds.

CA = X - M + N (gifts not included.)

Question 3

Show how National Income relates to Domestic absorption.

Answer 3

Yn - A = C + I + G+ X - M + N -( C + I + G)
= N + X - M = CA = -KA

GNP - Domestic Absorption = Current Account

Question 4

Show the capital account breakdown equation.

Answer 4

KA = S_NF - ΔR

Where S_NFis net foreign saving, or the savings flow into the local economy.

Question 5

Show the full balance of payments expression.

Answer 5

BOP = KA + CA = 0

= (S_NF - ΔR) + N + X - M = 0

Question 6

What is the total saving in the domestic economy?

Answer 6

S_d = (T-G) + S = S_g + S

Question 7

What does the equation Y_n - A = CA tell us?

Answer 7

Any current account surplus is a surplus of

• GNP over domestic absorption.
• Domestic saving over investment.

Question 8

Show that Y_n - A = S_d - I

Answer 8

Y_n - A = (C + T + S) - (C + I + G)

As T - G = S_G

= S_G + S - I

= S_D - I

Question 9

Show how investment relates to components of the capital account.

Answer 9

As Y_N - A = CA = -KA = -S_NF + ΔR

Y_N - A = S_D - I

-S_NF + ΔR = S_D - I

I = S_D - ΔR + S_NF

Question 10

Equate total injections to total withdrawals.

Answer 10

Exp on GDP:Y = C_H + I + G + X = C + I + G + X - M

Income Expenditure:Y = -N + C + T + S

C + I + G + X - M = -N + C + T + S

G + I + X = -N + T + S + M

(Yotal Injections) = (Total Withdrawals)