MT Exam 1

Given the following Balance of Payment data for a given country: Current account balance: $1,400 Capital account balance: $-35 What must be the financial account balance?

-1365

Which of the following is not a part of the definition for Gross National Product?

...produced within a country's borders...

We have the following data for a hypothetical open economy: GNP=$9,000 Consumption (C)= $8,000 Investment (I)= $800 Government Purchases (G)= $1,400 What is the value of the current account balance?

CA=EX-IM Y=C+I+G+EX-IM, and CA=EX-IM, then 9,000=8000+800+1400+CA Solve for CA = -12,000

Canada and Australia are (mainly) English-speaking countries with populations that are not too different in size (Canada is 60% larger). But Canadian trade is twice as large, relative to GDP, as Australia's. Why should this be the case?

Canada is close to a major economy Transportation costs for imports and exports are higher in Australia because the distance goods must travel

Identify the following as debit or credit entries in the balance of payments: Export expenditure foreign assets held in the us income payments official reserve assets u.s. assets held abroad

Credit- CA Credit-FA Debit-CA Credit-FA Debit- FA

The difference between Gross National Product (GNP) and National Income is a trivial amount.

False. National income equals GNP less depreciation, plus net unilateral transfers, less indirect business taxes

In general, which of the following tends to promote the probability of trade volumes between two countries?

Historical ties, size of economies, mutual membership in preferential trade agreements, linguistic and/or cultural affinity

Private saving can be given by the following equation: S^p= I+CA+(G-T) This equation can be rewritten as: CA=(S^p-I)+(T-G) Nowadays, some people recommend restrictions on imports from China (and other countries) to reduce the American current account deficit. How would higher U.S. barriers to imports affect private saving, domestic investment, and government deficit ?

It is impossible to tell without a general equilibrium model.

Do you agree that import restrictions would necessarily reduce a U.S. current account deficit?

No, because we cannot tell what general equilibrium effects will be.

GNP accounts avoid double counting by including only the value of final gods and services sold on the market. Should the measure of imports and exports used in the GNP accounts therefore be defined to include only imports and exports of final goods and services received from and sold to other countries?

No, total values and imports and exports should be included in the calculation of the GNP

We have the following data for a hypothetical closed economy: GNP= $9,000 Consumption (C)= $7,500 Government Purchases (G) = $1,600 Tax Collections (T)= $1,200 What is the value of private savings? What is the value of government savings? In this closed economy, what must be the value of investment expenditure?

Private Savings=Y-T-C =$9,000-1,200-7,500 =300 Government savings= T-G =1,200-1,600 =-400 P+G= National Saving -400+300 =-100

We have the following data for a hypothetical open economy: GNP=$14,000 Consumption (C)= $8,000 Investment (I)= $1,400 Government purchases (G)=$1,400 Tax Collections (T)= $1,200 What is the value of total savings? What is the value of the current account balance CA?

Private savings is defined as the part of disposable income that is saved rather than consumed. Private saving, can therefore be expressed as PS= Y-T-C GS= T-G Total savings S = 14,000-1,200-8,000+1,200-1,400= 4600 CA Balance = GNP-C-I-G = 14,000-8,000-1,400-1,400 =3200

Suppose the U.S. net foreign debt is 100% of U.S. GDP and that foreign assets and liabilities alike pay an interest rate of 5 percent per year. What would be the drain on U.S. GDP from paying interest on the net foreign debt?

The U.S. net interest payment on its foreign liabilities will be 5 percent of GDP

The nation of Pecunia had a current account deficit of $1.5 billion and a nonreserve financial account surplus of $700 million in 2014 a. What was the balance of payment of Pecunia in that year? What happened to Pecunia's net foreign assets in 2014? b. Assume that foreign central banks neither buy nor sell Pecunian assets. How did the Pecunian central bank's foreign reserves change in 2014? How would this official intervention show up in the balance of payments account of Pecunia? c. if foreign central banks bought $100 million of Pecunias assets in 2014, how would these official purchases enter Pecunia's balance of payments accounts? Continue assuming foreign central banks' purchases of Pecunia's assets. Given the above information,

The balance of payments of Pecunia was -$800million Pecunia's net foreign assets fell by $1,500 million Pecunian central bank reserves fell by $800 million It will appear as $800 million financial inflow in Pecunia's balance of payment accounts. In this case, Pecunia central bank foreign reserves will fall by $700 million i. Foreign central bank's purchase of Pecunia's assets represent an increase in foreign official reserves held in Pecunia in the amount of $100 million, which represents a financial account credit. ii. Pecunia's central bank foreign reserves will fall by $700 million, a financial account credit iii. Total net financial inflows will be $1500 million

An American bought a share of German stock and paid by a check on an account with a Swiss bankAn American bought a share of German stock and paid by a check on an account with a Swiss bank. Describe how this transaction generates two entrieslong dash—a credit and a debitlong dash—in the American balance of payments​ accounts, and describe how each entry would be classified.

The main transaction will be represented as a debit on U.S. financial account. The offsetting transaction will be represented as a credit on U.S. financial account.

A New Yorker travels to New Jersey to buy a​ $100 telephone answering machine. She pays for the machine with a check that the company that sold the machine deposits into its account. How would this transaction show up in the balance of payments accounts of New York and New​ Jersey?

This transaction will show up as debit in the current account of New York and as credit in the current account of New Jersey. The offsetting transaction will show up as credit in the financial account of New York and as debit in the financial account of New Jersey.

Mexico and Brazil have very different trading patterns. Mexico trades mainly with the United States and Brazil trades about equally with the United States and with the European Union. Mexico does much more trade relative to its GDP. These differences can be explained via the gravity model. Which of the following equations is the most general form of the gravity model?

Tij= A x (Y_i^a×Y_j^b)/(D_ij^c )

Suppose GDP for each country is doubled Does this mean that if the GDP of every country in the world doubled, world trade would quadruple?

Value of exports is doubled for each. no.

Capital gains and losses on a country's net foreign assets are not included in the national income measure of the current account. How would economic statisticians have to modify the national income identity Y= C+I+G+X-M if they did wish to include such gains and losses as part of the definition of the current account?

Y=C+I+G+X-M+Net capital gain

Is it possible for a country to have a current account deficit at the same time it has surplus in its balance of payments?

Yes

Evaluate the following statement: Mexico is quite close to the U.S., but it is far from the European Union. So it makes sense that it trades largely with the U.S. Brazil is far from both, so its trade is split between the two. Do you agree or disagree? Based on the gravity model, I would

agree. The gravity model predicts trade volume is proportional to the products of the GDPs of the trading partners and inversely related to the distance from each other.

A century ago each country's exports were shaped largely by

climate and natural resources

Gross National Product represents the sum of the following expenditure categories:

consumption, investment, government purchases, and the current account balance

In an open economy holding GNP and consumption spending constant and where private savings equals domestic investment, a government budget deficit must be matched by

current account deficit

Which of the following is NOT an account in the balance of payments?

future account

International economics can be divided into two broad subfields:

international trade and international money

An important insight of international trade theory is that when countries exchange goods and services one with the other, it

is usually beneficial to both countries

Look at number 27

just learn it

GNP (Gross National Product) equals GDP plus

net receipts of factor income from the rest of the world

In the pre-World War I period, the UK imported primarily

primary products including agricultural

According to the gravity model, a characteristic that tends to affect the probability of trade existing between any two countries is

the distance between them

One of the principle uses of gravity models is the identification of anomalies in trade. Based on this figure, anomalies in trade appear most evident for

the two countries furthest from line of best fit