1. All transactions in the latest financial year between country X and the rest
ID: 1144403 • 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
i) Balance of trade in goods is the difference between export of visible goods and import of visible goods. Here export of visible goods is export of machines ($650,000) and Import of visible goods is Import of foodstuff($430,000) + Import of textiles ($300,000). Therefore Balance of trade in goods = $650,000 - $430,000 - $300,000 = $(650000 - 730000) = -$80,000. So it will add as overall negative in balance of payment or deficit in balance of payment.
ii) Balance of trade in services is the money received by providing services minus money paid due to get any services. Here services only is the expenditure made by the foreign tourist i.e 90,000. So it will add as positive or surplus in balance of payment. Because we receiving the money due to provide services to foreign tourist.
iii) Balance of trade is the difference balance of trade in goods (-$80,000) and balance of trade in services (+$90,000) . So overall 90,000 - 80,000 = $10,000. It will be positive or surplus in balance of payment. So overall balance of trade is surplus of $10,000 in balance of payment.
iv) We know that there is two component balance of payment current account and capital account. Current account is the sum of balance of trade + net incme [(didend received + direct transfer) - interest payment] + trade credit = 10000 + [(30,000 +5000) - 35000] + 180,000 = 190,000 . So in current account there will be surplus of 190,000 in balance of payment. Trade credit is added positive in current account and negative in capital account.
v) Capital account balance is difference between purchase of ownership of foreign assets by domestic country and purchase of ownership of domestic asseets by foreigners. Here purchase of share(7000) included negative in capital account. Here also include trade credit as negative (180000). So overall deficit in capital account is 18000+7000 = $187,000.
vi ) The financial account will also the loan received from the abroad and repayment of laon by foreigners and loan paid to the foreigners and repayment of loan to foreign. Here there is no such transaction.
vii) Current account - capital account = Net errors or ommission = 190000 - 187000 = 3000
viii) Balance of payment = Current account + capital account + net errors = 190000 - 187000 - 3000 = 0
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