ECON 7520 SEMESTER 2, 2023 Tutorial 1
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ECON 7520
SEMESTER 2, 2023
Tutorial 1
Problem 1 (Current Account Deinition)
Review the following concepts.
(a) Current Account Balance = Trade Balance
+ Income Balance
+ Net Unilateral Transfers.
• Trade Balance = Merchandise Trade Balance + Services Balance.
• Income Balance = Net Investment Income
+ Net International Compensation to Employees.
(b) Financial Account = Increase in Foreign-Owned Assets in Home Country — Increase in Home-Owned Assets Abroad.
Answer: Go over the current account deinition. Use your own words to ex- plain each term. For example:
• Merchandise trade balance: The export of bananas - the import of bananas.
• Service balance: The export of hotel services for foreign visitors - import of hotel services for Aussie travelers.
• Net investment income: The returns to your foreign stocks held.
• Net international compensation to employees: Salaries for Australians who work at aforeign company such as Amazon.
• Net unilateral transfer: Money from your parents transferred to your bank account in Australia as gift.
Problem 2 (Balance of Payments Accounting)
Describe how each of the followingtransactions affects the Australian Balance of Payments. (Recall that each transaction gives rise to two entries in the Balance- of-Payments Accounts.)
(a) An Australian university buys several park benches from Spain and pays with a $120,000 check.
Answer: CA = — $120, 000, FA = +$120, 000
(b) An Australian resident buys $5,000 worth of British Airlines stock, paying with Australian dollars.
Answer: CA = 0, FA = — $5, 000 + $5, 000 = 0
(c) A French consumer imports an Australian wool jacket for $200 and pays with a check drawn on an Australian bank in Melbourne.
Answer: CA = +$200, FA = — $200
(d) An Australian company sells a subsidiary in Australia to another Australian company and with the proceeds (1 million dollars) buys a French company.
Answer: CA = 0, FA = — $1, 000, 000 + $1, 000, 000 = 0
(e) A group of Australian friends travels to Fiji and rents a vacation home for $2,500. They pay with a Australian credit card.
Answer: CA = — $2, 500, FA = +$2, 500
(f) Australia sends medicine, blankets, tents, and nonperishable food worth 400 million dollars to victims of an earthquake in a foreign country.
Answer: CA = $400, 000, 000 — $400, 000, 000, FA = 0
2023-09-05