In 1995, the U.S. economy imported $750 billion in goods and exported $576 billi

Question

In 1995, the U.S. economy imported $750 billion in goods and exported $576 billion in goods. However, it exported $219 billion in services and imported $141 billion in services. Receipts of income from abroad were $211 billion while income payments going abroad were $191 billion. Unilateral transfers from the United States to other countries were $34 billion. Calculate the merchandise trade deficit for 1995. Calculate the current account balance for 1995. Also, explain how you decided whether payments on foreign investment and unilateral transfers counted on the positive or the negative side of the current account balance.

Explanation / Answer

U.S. Current account - Year !995;

Exports: Exports $576 + $219 + Receipts $211 = $1006 billion

Imports: $750 + $141 + Payments $191 + Transfer $34 = $1,116 billion

Trade deficit = $110 billion.

The current account is a calculation of a country’s foreign transactions, and along with the capital account is component of a country’s balance of payments. A current account deficit represents a negative net sales abroad. Hence, payments on foreign investment and unilateral transfers will count on the negative side of the current account balance. These are outflows that determine the level of deficit.

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