Assignment – Chapter 13

Question 1: How do you record the following transactions into the US. Balance of
Payments (BoP) in 2020?
Answer:
1. A Japanese investor bought stocks of American Airlines Corp. It is worth $45,000, in
cash.

Debit Credit
(K) Inflow of Foreign Portfolio Investment $45,000
(FA) Receive cash abroad (Import cash asset) $45,000

2. The US companies bought catfish from a company Vietnam. 234,000 USD. Payment will
be made after 3 months.

Debit Credit
(FA) Account Payable $234,000
(CA) Imports of goods $234,000

3. GM Corporation has decided to invest 1,354,000 USD in Vietnam.

Debit Credit
(K) outflow of FDI $1,354,000
(FA) Pay cash aboard (export of cash asset) $1,354,000

4. Laos received 3,230,000 USD of ODA from the Unites States.

Debit Credit
(CA) Outflow of ODA $3,230,000
(FA) Cash outflow $3,230,000

5. Vietnamese overseas sent ther part of income to their relatives in Vietmam. 456,000
USD. In cash.

Debit Credit
(CA) Out flow of foreigner’s income $456,000
(FA) cash outflow $456,000

Question 2: Vietnamese citizens went working in Korea. They sent their income back to the
families in Vietnam, worth of $678,000. Which account is affected? how do you record this
into the US BoP?
Answer:
- Account will be affected if we record on Korea BoP
debit credit
(CA) outflow of foreigner’s income $678,000
(FA) cash outflow $678,000

- Since U.S BoP records the transaction between U.S with others countries, thus, the transaction
between Vietnam and Korea using U.S dollar will not be recorded in U.S BoP.

Question 3: How does a country behave if it has BoP Surplus?

Answer:
If BoP is positive  BoP Surplus, which also means that:
 USD Foreign Reserves of the country increase. The country is better off. It can use this
surplus to pay national debts or lend to other countries.
 In others words, their exports > imports  in the long run ì the country becomes export-
drive growth  the government must encourage the citizen to spend more.

Question 4: How does a country behave if it has BoP Decifit?

Answer:
If BoP is negative  BoP Deficit, which also means that:
 USD Foreign Reserves of the country reduce. The country is worse off.
 In other words, their imports > exports  the country may borrow money to finance its
imports.  In the long run, the country pays more for consumption instead of investment 
they may sell their asset (land, resources, commodities) to have money to pay for
creditors.
 some measures the country can adopt to improve the situation:
o encourage export
o restrict import
o develop stock markets
o increase export of services (labor)

Question 5: What are differences between a country’s GNP and GDP?

Answer:

 Gross domestic product (GDP) is the value of all (intermediate and final) goods and
services produced as output by firms, minus the value of all intermediate goods and
services purchased as inputs by firms. (GDP is also known as value added.)
 GNP = GDP + net receipts of factor income from the rest of the world.
 Movements in GDP and GNP usually do not differ greatly, as a practical matter.
  GDP is different than GNP in that it does not account for a country's production using services
with foreign-owned capital.

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Assignment – Chapter 11

Question 1: Price of good X in the US: PUS = 5 USD; and the price of good X in Europe is
PEU = 6EUR. If the LOOP is hold, what should be the Exchange Rate EUSD/EUR?

Answer: The LOOP implies the price of good X must be the same in 2 countries, which means
PEU = PUS*E  6 = 5*E
EEUR/USD = 1.2  1EUR = 1.2 USD.

Question 2: A basket of goods and services has the following prices in two countries as
follows:

Goods and Price in Vietnam Price in the

services (VND) U.S (USD)
Wheat 18,000 3
Beef 89,000 20
Potatoes 28,000 1,5
Petroleum 22,000 3

What should be the Exchange Rate Evnd/usd if the PPP is hold?

Answer: According to PPP, total value of the basket of goods and services must be equal in two
countries, thus:

(18,000 + 89,000 + 28,000 + 22,000) VND = (3 + 20 + 1.5 + 3) USD

 157,000 VND = 27.5USD

 1USD = 5,709 VND

Question 3: Given PEU=100; PUS=216; EUSD/EUR=1.18. Are the US goods undervalued or

overvalued?

Answer:

P EU∗E 100∗1.18
q= = = 0.55 < 1
PUS 216
 this means the US goods are more expensive than the European goods or the US goods are
overvalued.

Question 4: What happens to the USD if inflation in the European countries reduces?

Answer:
Inflation Rate in European countries reduces means π(E)↓ → %∆Eo↓ → Eo↓
The USD becomes depreciated in Europe.

Question 5: What is the Money Supply M1?

Answer: M1 = Currency in circulation + demand deposits; Where Demand deposits are

checking accounts payable on demand by the bank customer.

Question 6: The US forecasts an increase in economic growth rate of the European

countries next year. What will happen to the Exchange Rate E$/€ in the Unites States?

Answer: Between US and the Europe: %E0 = (%MUS - %MEU) + (%YEU - %YUS)

Where:
%MEU: Money Supply in European countries (in EUR)
%MUS: Money Supply in the US (in USD)
%YUS: Economic growth rate of US
%YEU: Economic growth rate of European countries

The US forecasts an increase in economic growth rate of the European countries next year 
%YEU => %E0 
The Exchange Rate E$/€ will increase in The U.S.
 USD appreciated vs Euro

Question 7: To recover the Economy, the US Federal Reserve Bank decided to increase the
Money Supply M1. How does it affect the Foreign Exchange Rate EVND/USD in Vietnam?

Answer: Between Vietnam and the US: %E0 = (%MVN - %MUS) + (%YUS - %YVN)
The US Federal Reserves is the Central Bank of the US. When the Central bank increases Money
Supply, µUS↑ percentage change in Exchange Rate ∆E$/VND/E$/VND↑ The VND becomes
appreciated in the US.

Question 8: What factors affect the Nominal Exchange Rate in the long-run?

Answer:

- Inflation rate negatively correlates with the purchasing power. Change in purchasing power
positively correlates with exchange rate
 - The supply of money and interest rates issued by central banks influenced inflation, and thus
exchange rates in the long run

- International trade balance, earnings of foreign currencies from trade, the ratio comparing
import prices and export prices, also effect currency depreciation / appreciation

Question 9: How does it affect the Foreign Exchange Rate Evnd/usd if the State Bank of
Vietnam decides to reduces VN interest rate?

Answer: We have foreign exchange rate (F) = E0*(1 +iVN)/(1+ iUSD)

with E0 is initial foreign exchange rate (EVND/USD)
 if the state bank of Vietnam reduces the interest rate, it means that iVN F the exchange rate
EVND/USD is expected to fall in the future.

Question 10: How does Money Supply affect the Interest Rate in the Long-run?

Answer: Assume Vietnam Government increases the country’s money supply

 Relative (PPP): expected rate of VND depreciation=expected inflation differential

∆ Ee
=π eVND ,t −π eUSD ,t
E VND , t
USD

 UIP (approximation): expected rate pf VND depreciation = net VND interest rate – net USD
interest rate
∆ EeVND/ USD
=iVND −i USD
EVND/ USD
 Relative PPP and UIP imply: nominal interest rate differential = nominal inflation rate
differential
i VND −iUSD =π eVND, t−π eUSD , t
Fisher effect which means that if Vietnam Government increase money supply increase the
inflation rate in Vietnam one-for-one increases in the nominal interest rate in Vietnam.