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1、.Answers to End of Chapter QuestionsChapter 1Keeping Up With a Changing World-Trade Flows, Capital Flows, and the Balance Of Payments1.The balance on merchandise trade is the difference between exports of goods, 719 and the imports of goods, 1,145, for a deficit of 426. The balance on goods, service
2、s and income is 719 + 279 +284 1145 - 210 269, for a deficit of 342. Adding unilateral transfers to this gives a current account deficit of 391, -342 + = -391. 2.Because the current account balance is a deficit of 391, then without a statistical discrepancy, the capital account is a surplus of 391.
3、In this problem, however, the statistical discrepancy is recorded as a positive amount of 11. Hence, the sum of the debits in the balance of payments must exceed the credits by 11. So, the deficit of the current account must be greater than the surplus on the capital account by 11. The capital accou
4、nt, therefore, is a surplus of 391 11 = 380.3.A balance-of-payments equilibrium is when the debits and credits in the current account and the private capital account sum to zero. In the problem above we do not know the private capital account balance. We cannot say, therefore, whether this country i
5、s experiencing a balance-of-payments surplus or deficit or if it is in equilibrium.4The current account is a deficit of $541,830 and the private capital account balance is a surplus of $369,068. The U.S., therefore, has a balance of payments deficit.5Positive aspects of being a net debtor include th
6、e possibility of financing domestic investment that is not possible through domestic savings; thereby allowing for domestic capital stock growth which may allow job, productivity, and income growth. Negative aspects include the fact that foreign savings may be used to finance domestic consumption ra
7、ther than domestic savings; which will compromise the growth suggested above.Positive aspects of being a net creditor include the ownership of foreign assets which can represent an income flows to the crediting country. Further, the net creditor position also implies a net exporting position. A nega
8、tive aspect of being a net creditor includes the fact that foreign investment may substitute for domestic investment.6A nation may desire to receive both portfolio and direct investment due to the type of investment each represents. Portfolio investment is a financial investment while direct investm
9、ent is dominated by the purchase of actual, real, productive assets. To the extent that a country can benefit by each type of investment, it will desire both types of investment. Further, portfolio investment tends to be short-run in nature, while FDI tends to be long-run in nature. This is also add
10、ressed in much greater detail in Chapter 7.7. Domestic Savings - Domestic Investment = Current Account Balance Domestic Savings - Domestic Investment = Net Capital Flows Therefore, Current Account Balance = Net Capital Flows8Using the equations above, private savings of 5 percent of income, governme
11、nt savings of -1 percent, and investment expenditures of 10 percent would results in a current account deficit of 6 percent of income and a capital account surplus of 6 percent of income. This could be corrected with a reduction in the government deficit and/or an increase in private savings.Chapter
12、 2The Market for Foreign Exchange1.Because it costs fewer dollars to purchase a euro after the exchange rate change, the euro depreciated relative to the dollar. The rate of depreciation was /1.2201100 = 0.27 percent.2.Note that the rates provided are the foreign currency prices of the U.S. dollar.
13、Every value has been rounded to two decimal places which may cause some differences in answers.A$C$Sfr$Australia-2.351.061.121.53Britain0.42-0.450.470.65Canada0.952.23-1.061.45Switzerland0.902.110.94-1.37United States0.651.540.690.73-3The cross rate is 1.702/1.234 = 1.379 , which is smaller in value
14、 than that observed in the London market. The arbitrageur would purchase 587,544 with the $1 million in the New York market. Next they would use the 587,544 in London to purchase 837,250 . Finally, they would sell the 837,250 in the New York market for $1,033,167 . The profit is #33,167.4.Total trade is = 796,280. Trade with the Euro area is = 424,861. Trade with Canada is = 371,419. The weight assigned to the euro is 424,861/796,280 = 0.53 and the weight assigned to the Canadian dollar is 0.47. Because the base year is 2003, the 2003 EER is 100. The value of the 2004 EER is
