1. All transactions in the latest financial year between country X and the rest
ID: 1144222 • Letter: 1
Question
1. All transactions in the latest financial year between country X and the rest of the world are given as follows Transaction Export of machines Import of foodstuff Import of textiles Expenditure by foreign tourists in country X Dividends received from abroad Export of cars on trade credit with payment due a year later Interest payment paid to investors abroad Purchase of shares in companies abroad Amount (E) 650,000 430,000 300,000 90,000 30,000 180,000 35,000 7,000 5,000 Deposits in country X accounts made by transfers from abroad Trade credit is an agreement set up between a supplier and a purchaser such that the goods are exchanged now and the payment takes place at a later date. Calculate the following quantities for country X, indicating clearly in each case whether the balance represents a surplus or a deficit on the Balance of Payments i) Balance of trade in goods (visible trade balance) ii) Balance of trade in services i) Balance of Trade iv) Current account balance v) Capital account balance vi) Financial account balance vii) Net errors and omissions viii) Balance of Payments. [Total: 9 marks]Explanation / Answer
Question 1
(i) Calculate the Balance of trade in goods -
Balance of trade in goods = Exports of machines + Exports of cars on trade credit - Import of food stuff - Import of textiles
Balance of trade in goods = 650,000 + 180,000 - 430,000 - 300,000 = 100,000
The Balance of trade in goods is 100,000.
The positive balance of trade in goods indicates surplus in the Balance of Payments.
(ii)
Calculate the Balance of trade in services -
Balance of trade in services = Expenditure by foriegn tourists in country X = 90,000
The Balance of trade in services is 90,000.
The positive balance of trade in services indicates surplus on the Balance of Payments.
(iii) Calculate the Balance of Trade -
Balance of Trade = Balance of trade in goods + Balance of trade in services
Balance of Trade = 100,000 + 90,000 = 190,000
The Balance of Trade is 190,000.
The positive balance of trade indicates surplus on the Balance of Payments.
(iv) Calculate the Current account balance -
Current account balance = Balance of Trade + Dividends received from abroad + Interest payment paid to investors abroad
Current account balance = 190,000 + 30,000 - 35,000 = 185,000
The Current account balance is 185,000.
The positive current account balance indicates surplus in Balance of payments.
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