Chapter 9: Trade and the Balance of Payments

Class Notes: these count for 1% of your total grade

Name: Duc Hoang
ID: 1622208
1. Definitions
Current Account: the account used to track the inflow and outflow of goods and services for a
country.
Financial Account: the account used to record financial transactions of a country, such as bonds,
stocks, foreign investments, etc.
Capital Account: a record of transfers of special types of capital.
Current Account Balance: an account to measure all nonfinancial records of a nation with the
rest of the world, including (1). Goods and services trade, (2). Investment income of existing
investments (called primary income), and (3). Transfer payments such as foreign aid or
remittances (called secondary income).
Trade Deficit: negative trade balance, which means that imports exceed exports.
Trade Surplus: positive trade balance, which means that exports exceed imports.
Statistical Discrepancy: the size of measurement error, which is the residual difference between
financial account and sum of capital and current account.
GDP (Gross domestic product): measure total final output of a country within the border
GNP (Gross national product): measure total final output using national resources regardless of
place of production.
2. Provide the correct order to find the current account balance (i.e. goods exports +
services exports – goods…)
Current Account Balance (CA) = ( Good exports + Services exports ) – ( Goods imports –
Services imports ) + ( Investment income received – Investment income paid ) + Net transfer
payments
3. When is a country in a current account surplus?
Exports and imports usually account for the major proportion of the current account balance;
thus, the current account surplus happens largely because a country exports more than its
imports. However, when there is an approximate balance between exports and imports, we need
to look further at the net investment income and net transfer payments to see whether they are
positive and for how much.
4. Provide the correct order to determine the financial account balance
Financial account balance = Net acquisition by domestic citizen of foreign financial assets
(excluding financial derivatives) – Net acquisition by foreign citizens of domestic financial
assets (excluding financial derivatives) + Net change in financial derivatives
5. Provide the formula to determine the statistical discrepancy
Statistical discrepancy = Financial account balance – (Current account balance + Capital account
balance)
6. Using savings, investment, taxes and government expenditures, provide a formula to
show how to calculate the current account balance.
GDP = C + G + I + NX = C + G + I + E – M
GNP = GDP + Investment income paid to home citizen – Investment income paid to foreigner +
Net change in unilateral transfer = GDP + (CA – NX) = (C + G + I + NX) + (CA – NX) = C + G
+ I + CA
From the point of view of the income recipients, GNP = C + S + T
=> C + S + T = C + G + I + CA  S + (T – G) = I + CA
=> CA = S + (T – G) – I
7. What scenarios arise to cause the current account to be in a deficit?
As explained earlier for the case of surplus, current account deficit normally happens when a
country imports more than its exports. However, when there is an approximate balance between
imports and exports, we’ll need to look further at the net investment income and net transfer
payments.