International Macroeconomics Question Set 1
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International Macroeconomics
Question Set 1
Exercise 1 Consider the following transactions in the United States during the year 2009 (all values are in millions of dollars):
Exports of goods Exports of services Income receipts from abroad Imports of goods Imports of services Income payments to the rest of the world Unilateral transfers, net Capital account transactions, net Net additions to external assets Net additions to foreign liabilities Private consumption Investment Government Expenditures Private Saving |
1,068,499 502,298 588,203 1,575,443 370,262 466,783 -124,943 -140 140,465 356,540 9,866,100 1,546,800 2,917,500 2,569,600 |
With this information, compute (you must show all your calculations):
(a) The merchandise balance.
Merchandise balance = Exports of goods - Imports of goods = 1, 068, 499 - 1, 575, 443 = -506, 944.
(b) The service balance.
Service balance = Exports of services - Imports of services
= 502, 298 - 370, 262
= 132, 036.
(c) The income balance.
Income balance = Income receipts from abroad - Income payments to the rest of the world
= 588, 203 - 466, 783
= 121, 420.
(d) The trade balance.
Trade balance = Merchandise balance + Service balance
= -506, 944 + 132, 036
= -374, 908.
(e) The current account balance. Were the United States a net lender or a net borrower in 2009?
Explain.
Current Account balance = Trade balance + Income balance + Net Unilateral Transfers
= -374, 908 + 121, 420 + (-124, 943)
= -378, 431.
The US ran a current account deficit in 2009. This implies that in 2009, the US ran a sur- plus in its assets accounts (the Financial Account and the Capital Account), which in turn implies that the US exports of assets to the rest of the world exceeded its imports of assets from the rest of the world. As a result, we can conclude that the US was a net borrower in 2009.
(f) The financial account balance. Does your answer confirm your findings in (e)? Explain.
Financial Acct balance = Net additions to foreign liabilities - Net additions to external assets
= 356, 540 - 140, 465
= 216, 075.
In 2009, the US ran a surplus in its Financial Account since its net exports of assets (or its net additions to foreign liabilities) were greater than its net imports of foreign assets (its net additions of external assets). This confirms our previous answer that the US was a net borrower in 2009 (note that the Capital Account balance is very small).
(g) Gross National Expenditure, Gross Domestic Product, Gross National Income and Gross Na-
tional Disposable Income.
= 9, 866, 100 + 1, 546, 800 + 2, 917, 500
= 14, 330, 400
Gross Domestic Product = Gross National Expenditure + Net Exports (or Trade Balance) = 14, 330, 400 + (-374, 908)
= 13, 955, 492 + 121, 420
= 14, 076, 912
Gross Nat. Disp. Income = Gross National Income + Net Unilateral Transfers
= 14, 076, 912 + (-124, 943)
= 13, 951, 969.
(h) Government Saving and Tax Revenues. Were the United States running a government deficit
or a government surplus in 2009? Explain.
Using the Saving/Investment identity, we can find Government Saving:
Investment = Private Saving + Government Saving - Current Account 1, 546, 800 = 2, 569, 600 + Government Saving - (-378, 431)
This implies that Government Saving is equal to -1,401,231. Thus, the US government was running a deficit in 2009, since its savings were negative.
We can find Tax Revenues by using the Government budget constraint: Government Saving = Tax Revenues - Government Expenditures. This implies that Tax Revenues = -1,401,231 + 2,917,500 = 1,516,269.
(i) Net financial flows.
The US Financial Account balance in 2009 was 216,075. The net financial flows are equivalent to the Financial Account balance, that is, they are equal to 216,075.
(j) Suppose that at the end of 2008, the United States NIIP1 was -3,493,882 millions. If there
are no valuation changes, what is the NIIP at the end of 2009?
If there are no valuation changes, then the only source of changes to the NIIP is the Financial Flows. Recall:
∆ NIIP = Financial Flows + Valuation Changes = -Financial Acct Balance + Valuation Changes
= -216, 075 + 0
= -216, 075.
If at the end of 2008 the US NIIP was -3,493,882 millions, and the change in the NIIP between the end of 2008 and the end of 2009 was equal to -216,075, then in the absence of valuation changes, the US NIIP at the end of 2009 is -3,493,882 -216,075 = -3,709,957.
Note that since the US was a net borrower in 2009 (and since there are no valuation effects) the US NIIP worsened during 2009.
(k) Suppose instead that the valuation effects were equal to 972,111 millions. What is the US
NIIP at the end of 2009? Explain why these valuation effects helped improve/worsen the US NIIP.
In this case, we have:
∆ NIIP = Financial Flows + Valuation Changes = -Financial Acct Balance + Valuation Changes
= -216, 075 + 972, 111
= 756, 036.
If we consider the valuation effects, we see that although the US was a net borrower in 2009 (and this should have worsened its NIIP), the positive valuation changes more than compensated the decline in the NIIP coming from the Financial Flows channel. Since the valuation changes played in favor of the US during 2009 (and exceeded the financial flows), the NIIP actually improved during that period.
Exercise 2 Show how each of the following would affect the U.S. balance of payments. Include a description of the debit and credit items, and in each case identify which specific account is affected (e.g., imports of goods and services, IM ; exports of home assets, EXA(H); and so on.).
(a) A California computer manufacturer purchases a $50 hard disk from a Malaysian company,
paying the funds from a bank account in Malaysia.
Transaction
Account Credit/Debit
Hard disk imported from Malaysia Decrease in Malaysian deposits owned by US
Imports
EXA(F)
-$50
+50
(b) A U.S. tourist to Japan sells his iPod to a local resident for yen worth $100.
Transaction
Account Credit/Debit
iPod exported to Japan
Increase in Japanese currency (assets) owned by US resident
Exports
IMA(F)
+$100
-$100
(c) The US central bank sells $500 million of its holdings of US Treasury bonds to a British financial firm and purchases pound sterling foreign reserves.
Transaction Account Credit/Debit
EXA(H)
IMA(F)
(d) A foreign owner of Apple shares receives $10,000 in dividend payment, which are paid into a New York bank.
Transaction
Account Credit/Debit
Dividend payment (capital compensation paid to a foreigner) Increase in deposits in US bank account owned by foreigner
IMFS
EXA(H)
-$10,000
+$10,000
(e) The central bank of China purchases $1 million of export earnings from a firm that has sold
$1 million of toys to the US, and the central bank holds these dollars as reserves.
Transaction Account Credit/Debit
Imports of toys from China China central bank buys dollars
Imports
EXA(H)
-$ 1 million
+$1 million
(f) The US government forgives a $50 million debt owed by a developing country
Transaction
Account Credit/Debit
Debt forgiveness KAOUT -$ 50 million
Decrease in external assets owned by US EXA(F) +$50 million
Exercise 3 This question asks you to compute valuation effects for the United States in 2004 using the same methods mentioned in the chapter. Use the bea.gov website to collect the data needed for this question.
Visit the following site: https://apps.bea.gov/iTable/?ReqID=62&step=1
You can find balance of payments data under the International Transactions (ITA) tables where you should obtain the U.S. balance of payments for 2004 in billions of dollars. (Table 1.1) Be sure to get the correct year, and annual data, not quarterly. Also visit the International Investment Position (IIP) Tables and obtain the U.S. net international investment position for end 2003 to end 2004. (Table 1.3)
(a) What was the U.S. current account for 2004?
The current account for the US in 2004 was -$635,890 million.
(b) What was the U.S. financial account for 2004?
The financial account for the US in 2004 was $542,220 million.
(c) What was the U.S. change in external wealth for 2004?
The change in the US NIIP in 2004 was -$70,371 million.
(d) What was the U.S. total valuation effect for 2004?
The total valuation effect in the US NIIP in 2004 was $471,848 million.
(e) Does the answer to part (d) equal the answer to part (b) minus the answer to part (c)? Why?
Yes. Recall:
∆ NIIP = Financial Flows + Valuation Changes
= -Financial Acct Balance + Valuation Changes -70, 371 = -542, 220 + Valuation Changes
This implies that Valuation Changes = 542,220 - 70,371 = 471,849, which coincides with our answer in (d) with a rounding error.
(f) What do the BEA data indicate was the U.S. valuation effect due to exchange rate changes
for 2004?
The valuation changes due to exchange rate changes in 2004 was $269,581 million.
(g) What were end-2003 U.S. external liabilities? If 5% of these liabilities were in foreign currency
and were subject to a 10% exchange rate appreciation, what decrease in U.S. external wealth resulted?
The US external liabilities by the end of the year 2003 were equal to $10,913,947 million. Thus, the 5% of these liabilities that were in foreign currency and were subject to a 10% exchange rate appreciation amounted to 0.05 x 10,913,947 = $545,697.35 million. As a result of this, the US external wealth declined by 0.10 x 545,697.35 = $54,569.73 million (the dollar-value of these liabilities increased, since they were denominated in foreign currencies and the dollar depreciated 10% with respect to these currencies).
(h) What were end-2003 U.S. external assets? If 65% of these assets (denominated in foreign
currency) were subject to a 10% exchange rate appreciation, what increase in U.S. external wealth resulted?
The US external assets by the end of the year 2003 were equal to $8,621,551 million. Thus, the 65% of these assets that were in foreign currency and were subject to a 10% exchange rate appreciation amounted to 0.65 x 8,621,551 = $5,604,008.2 million. As a result of this, the US external wealth increased by 0.10 x 5,604,008.2 = $560,400.82 million (since these assets were denominated in foreign currencies and the foreign currencies strengthened by 10% given the US dollar depreciation (or foreign currencies appreciation)).
(i) Using the answers to parts (g) and (h), what was the 2004 U.S. valuation effect due to ex- change rate changes according to your rough calculation? Is it close to the BEA figure in part (f)?
Using our calculations in (g) and (h), the valuation changes due to exchange rate changes are equal to $560,400.82 (gains) - $54,569.73 (losses) = $505,831.09 (net effect). This number is far larger than the actual exchange rate net gains reported by the BEA ($269,581, or part (f)). Thus, our rough calculations of exchange rate changes are not in line with what was observed in the data.
Exercise 4 Download the file AUS BOP 2023.xlsx which contains data on the Australian balance of payments from 1960–2022. (You will also use this for next week’s tutorial, so keep it handy.) Using the column letters, write out formulas for the following. For example, for the trade balance, your answer should be TB=column D + column E. (Note that debits are shown with a minus sign.)
(a) Net factor income from abroad. (ABS calls this primary income.)
NFIA=column M + column N
(b) Net unilaterial transfers. (ABS calls this secondary income.)
NUT= column P + column Q
(c) The capital account.
KA= column U + column V + column X + column Y (note that we need to add the subcomponents of the capital account which are “Acquisitions/disposals of non-produced non-financial assets” and “Capital transfers.”)
(d) The financial account.
FA = column AB + column AC + column AE + column AF + column AH + column AI + column AK + column AL + column AM (note that we need to add the subcomponents of the financial account which are “Direct investment”, “Portfolio investment”, “Financial derivates”, “Other investment” and “Reserve assets (only credit)” .)
(e) Does the balance of payment identity hold when you take into account statistical discrepancy
(also known as “Net errors and omissions”)? Show your answer using June 2022 numbers. Do you notice anything peculiar about Australia’s balance of payment entries in the last few years from previous years or even decades?
For June 2022, we have the following:
CA=46,171
KA=-602
FA=-48,686
Discrepancy = 3,117
CA+KA+FA+Discrepancy = 0
For three years in a row, Australia reversed its current account deficit trend since 1974 by posting current account surplus.
2023-02-27