Problem Set 2

(due Wednesday, September 19)

Part I: Record the following transactions into the U.S. balance of payments:

1. The Federal Reserve sells $10 worth of Euros and buys $10 worth of dollars from a bank in Frankfurt.

2. An American investors buys $20 worth of shares in a Chinese company. The investor pays with a check drawn on his dollar account at Citibank.

3. Microsoft pays $30 worth of dividends to its investor in Germany. Microsoft sends a check drawn on its dollar account at Citibank.

4. A U.S. importer buys $40 worth of BMW cars. The importer pays with a check drawn on his Euro account in Frankfurt.

5. Japanese publisher pays $50 worth of royalties to an American author. The publisher sends a check drawn on his Yen account in Japan.

Composition of BoP / Credit / Debit
Current Account
Goods (lines 2+20)
Services (lines 4+21)
Income (lines 12+29)
Unilateral transfers (line 35)
Capital Account (line 39)
Financial Account
U.S.–owned assets abroad (line 40) (changes in U.S. holdings of foreign assets)
Foreign Securities (line 52)
U.S. Claims abroad (lines 53+54)
Foreign–owned assets in the U.S. (line 55) (changes in foreign holdings of U.S. assets)
U.S. Securities (line 65+66)
U.S. Liabilities abroad (lines 68+69)
Official Reserves
U.S. official reserve assets (line 41)
Foreign official assets in the U.S. (line 56)
Useful Balances / Balance
Current Account (CA)
Trade Balance (goods)
Trade Balance (goods and services)
Non-reserve Capital Account (KA)
Overall Balance = CA + KA
Official Settlements Balance (OR)
Change in Official Reserve Assets (-∆R)
Net Private Capital Inflow = KA
Net Official Capital Inflow = OR

Part II: Consider the U.S. balance of payments from the second quarter of 2007 (released last Friday, 9/14) and answer the following questions:

1. Did the U.S. import more goods than it exported?

2. Did the U.S. sell more services than it bought?

3. Did the U.S. receive more income from its assets abroad (dividends, interest, repatriated profits) than foreigners received on their investment in the U.S.?

4. Did U.S. residents receive more private remittances than they sent?

5. Did the U.S. experience net capital inflows or outflows?

6. Did the U.S. private sector increase its holding of foreign assets?

7. Did the U.S. private sector increase its foreign liabilities?

8. Did the U.S. experience net private capital inflows or outflows?

9. Did the U.S. do more foreign direct investment abroad than the rest of the world did in the U.S.?

10. Did the U.S. private sector buy more foreign securities than it sold foreign securities?

11. Did the U.S.private sector buy on net more foreign securities than it sold U.S. securities?

12. Did the Federal Reserve increase its official reserves?

13. Did the foreign central banks increase their dollar denominated official reserves?

14. Find a newspaper article discussing Monday’s release. What is the main focus of the article?

Part III: Consider Japanese balance of payments for 2006 and answer the following questions:

1. Did Japan import more goods than it exported?

2. Did Japan sell more services than it bought?

3. Did Japan receive more income than it had to pay?

4. Did Japan experience net capital inflows or outflows?

5. Did Japan experience net private capital inflows or outflows?

6. Did Japan do more foreign direct investment abroad than the rest of the world did in Japan?

7. Did Japan buy more foreign securities than it sold?

8. Did Japan sell more of Japanese securities than it bought Japanese securities?

9. Did the Japanese Central Bank increase its official reserves?