Project #55065 - International Economics: Theory and Policy

1.     a.

For each of the following transactions indicate (a) on which account the debit occurs, and (b) on which account the credit occurs. Your choices are current account (distinguish between merchandise, services and unilateral transfers), the capital account (KA), and official reserve transactions (ORT). For the KA and ORT accounts also indicate whether there is a decrease or increase in US assets abroad or foreign assets in the US. The dollar value of all transactions is 100. The US is always the domestic country.


(i)              A Canadian investor purchases new shares from a US firm, pays through her US bank account

(ii)            Russia sells oil to the US in exchange for US economic consultancy services.

(iii)          A US importer pays for the transportation services of a Greek shipping company by transferring money from its London bank account to the London bank account of the Greek shipping company.

(iv)          The Japanese central bank buys US Treasury bonds from a US commercial bank, pays in yen.

(v)            US allies transfer dollars to the US to help finance the war against terrorists (they don’t get any goods or services in return).

(vi)          The US government pays interest on Treasury bonds held by a German investor. The money is transferred from a US commercial bank account of the US government to the US bank account of the German investor.

(vii)        A US citizen, who has his permanent residence in Germany, sends dollars to his family in the US.

(viii)      A US firm builds a factory in Mexico, pays for the inputs (land, local labor, etc.) in pesos.

(ix)          A US investor earns interest in Euros on an investment in European government bonds.


      b.    For each transaction above calculate DCA, DKA, DORT (the change in the

             current account, capital account and ORT account). Add up these changes (across     

             all 9 transactions) and make sure that DCA+DKA+DORT=0.



2.     Assume that there are two countries: USA and Europe. The exchange rate is currently $1/Euro. US residents hold 100 European stock, while European residents hold 100 US stock. The price of each European stock is currently 100 Euros while the price of each US stock is currently $100. At the current exchange rate the value of both external assets and liabilities is $10,000 and the net foreign asset position is zero.       


  1. Assume that the prices of European and US stock remain the same (in respectively Euros and dollars).  However, the dollar depreciates to $1.20/Euro. Compute the new net foreign asset position in dollars.
  2. Assume that the price of US stock rises to $150. Compute the new net foreign asset position (hold exchange rate constant at $1/Euro).
  3. Assume that during the course of a year both the shocks in a. and b. happen, while at the same time the US runs a current account deficit of $2,000. Compute the net foreign asset position at the end of the year.





  1. Assume that national saving is 100, the trade account is -50, net income from unilateral transfers is 10 and net investment income is 30. Compute national investment.
  2. Assume capital outflows is 100 (private plus official), disposable gross national product is 200, national consumption is 130 and national investment is 80. Compute total capital inflows (private plus official).
  3. A country has external assets of 100 and external liabilities of 200. What is the present discounted value of the trade account?

Subject Business
Due By (Pacific Time) 01/28/2015 01:00 pm
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