The balance of payment

Q6. What is the meaning of surplus (deficit) on the (a) merchandize trade balance, (b)
goods and services balance, and (c) current account balance?

Ans. A surplus on the merchandize refers that the balance trade on goods is positive. It means a
nation is importing less than it exports which results into merchandize trade surplus. A deficit on
the merchandize is opposite to surplus, this means a nation is importing more than it is exporting.

The meaning of surplus on goods and service balance means the balance of trade positive, a
nation is importing less goods and services than it is exporting. While on the other side deficit on
goods and services balance is the opposite of surplus which means a nation is importing more
combine goods and services then it is exporting.

A surplus on current account balance means that the balance in the transaction of goods, service,
income, and unilateral transfer all are positive, this means a nation is receiving than it is giving.
A deficit on the current account balance is opposite of the surplus and this means nation is giving
(paying) more than it is receiving.

Q 8. What does the balance of international indebtedness measures? How this statement
does differ from balance of payment?

Ans. The balance of international indebtedness measures the accumulated value of assets aboard
that are owned by the nation it is opposite to the foreign owned assets within that particular
nation. The balance of international indebtedness is used to indicate the international position of
a nation in a given time by comparing the nation’s fixed stock assets and liabilities than the rest
of the world. The balance of international indebtedness differs from the balance of payment as
this statement measured at a single point in time while on the other side balance of payment is a
flow of concept which measured over a period of time.

Q 9. Indicate weather each of the following items represent a debt or a credit n the US
balance of payment.

Ans. A. A US importer purchases a shipload of French wine. This is a debt transaction because
US importers is paying to French to import wine.

b. A Japanese automobile firm builds an assembly plant in Kentucky. This is a credit transaction
because Japanese firm is paying to US.

c. A British manufacturer exports machinery to Taiwan on a US vessel. This is a credit

transaction because British manufacturer is paying to US.

d. A US college student spends a year studying in Switzerland. This is a debt transaction because
money is flowing out from US economy to pay the student’s fee.
e. American charities donate food to people in drought plagued Africa. This is a debt transaction
because money is flowing out from US.

f. Japanese investors collect interest income on their holdings of US government securities. This
is a debt transaction because money is flowing out from US economy in the hand of Japanese.

g. A German resident sends money to the relatives in the United States. This is a credit
transaction because money is flowing into the US economy.

H. Lloyds of London sells an insurance policy to a US business firm. This is a debt transaction
because money is flowing out from US economy to purchase the insurance.

i. A Swiss resident receives dividends on her IBM stock. This is a debt transaction because
money is flowing out from US economy to the Swiss stockholders.

Q 10. Table summarizes hypothetical transactions, in billions of US dollars that took place
during a given year.

Ans.

International Transaction of the United States (in

billions of dollar)
Travel and transportation receipt, net $25
Merchandize imports $450
Unilateral transfer, net -$20
Allocation of SDRs $15
Receipts on US investment aboard $20
Statistical discrepancy $40
Compensation of employees -$5
Changes in US assets aboard, net -$150
Merchandize exports $375
Other services, net $35
Payment on foreign investment in the US -$10

a. The US merchandize trade account balance shows if the country is running a surplus or
deficit in its international exchange of goods only. It is calculated as:
Merchandize export- Merchandize imports
= $375-$450
= -$75
 The services account balance reflects the imports and exports of services only. It is
calculated as:
Travel and transportations, net+ other services, net
= $25+$35
=$60
The goods and services account balance shows whether a country’s international trade is
in surplus or in deficit. This is calculated as:
Merchandize trade account +services account balance
= -$75+$60
=-$15

To know the US income account balance we must know the net investment, which can
calculated as:
Investment income, net= receipts on US investment abroad+ payments on foreign
investment in US.
= $20+ (-10)
= $10
Income account balance= compensation of employees+ investment income, net
= -$5+$10
= $5

The unilateral transfer account balance includes the transfer of goods and services or
financial assets between US and rest of the world. So it is calculated as:

Unilateral transfer account balance = Imports of listed item- exports of listed items
So it is provided in the table which is -$20.

The US current account balance indicates the monetary value of international flows that
arises from the exchange of services, goods, income flow and unilateral transfer between
the country and rest of the world.
Current account balance= -$15+$5+(-$20)= -$30
b. None of these balances explain the foreign net position of the US. The balance of
international indebtedness determines the country’s investment position. Given in the
above table the net changes in the US assets abroad are equal to -$150 so US is a debtor
nation. As the accumulated value of foreign owned assets exceeds the value of US owned
assets aboard so net international investment position is negative.

Q 11. The table give the hypothetical infomrmation of the United States’ international
investment position:
 International investment position of the United States
(in billions of dollar)
Foreign offical asstes in the US $25
Other foreign asstes in the US $225
US governement assets abroad $150
US p[rivate assets abraod $75

Ans To know whether US is a net creditor of net debetor we need to know wether the
accumulated value of US owned assets abraod exceeds the value of foreign-owned assets in the
US.

Total foreign owned assets in US are calsuted as:

Foreign offical assets in US +other foriegh assests in US

= $25+$225

= $250

Total US-owned assest abroad are calculated as:

Values of US governemnt assets abroad + value of US private assets abraod

=$150+$75

=$225

As the total foreign-owned assets in the US exceeds the total value of US-owned assets abroad
by $25 so it is concluded that US is a net debetor ntion.