World Economics I.

The Balance of Payments

Week 11
(23-11-2022)
Additional data on Hungary
• https://sta.mnb.hu/Reports/powerbi/STA-FMF/NegyedevesFizetesi_EN?rs:embed
=true

• For other parts on the BoP check here for instance

• https://www.imf.org/external/pubs/ft/bop/2014/pdf/BPM6_14F.pdf
• https://www.imf.org/external/pubs/ft/bop/2014/pdf/guide.pdf
Net lending
Problem 1 Merchandise exports $330m
Merchandise imports $198m

• We know the following data Service exports $196m

about a country. Calculate the
values of goods and services
balance, the current account,
the capital account. Is the
country decreasing or increasing
its net holdings of official reserve
assets?
Service imports $204m
Income flows, net $3m
Unilateral transfers, net -$8m
Increase in the country’s holding of
foreign assets, net (excluding $202m
official reserve assets)
Increase in the foreign holding of
the country’s assets, net $102m
(excluding official reserve assets)
Statistical discrepancy, net $4m
Solution 1
• Goods and services balance equals the net exports (NX = EX-IM) of both good and services. It is often called
the trade balance.
Merchandise balance (balance of goods) = EX – IM = 330 – 198 = +132
Balance of services = EX – IM = 196 – 204 = -8
Trade balance = Merchandise balance + balance of services = +132 + (-8) = +124

• Current Account = CA = NX + Income flows (net) + Unilateral transfers (net) = +124 +3 + (-8) = +119

• Capital account = Current account +102 – 202 = +119 + (-100)= +19

• The overall balance (or official settlements balance) equals the sum of the CA and private financial account
balance (plus the statistical discrepancy from mismeasuring items in the CA and financial account). If the
overall balance is in surplus, it is counterbalanced by an increase in the country’s official reserve holdings.
• In sum: debit item means increase in official reserve assets!
Problem 2 – 1) A Hungarian citizen is buying a German bond
2) Hungarian investors are receiving dividend from their
Bookkeeping foreign investment
(only single entries!) 3) General Motors Hungary is transfering its profit back to the
US
4) General Motors Hungary is expanding its capacitiy in
Hungary
5) General Motors Hungary is paying wages to its workers
6) German investors are buying government bonds in Hungary
7) We are visiting a foreign doctor
8) The Hungarian National Museum is selling entrance tickets
to foreign tourists
9) The Hungarian firm MOL Ltd is receiving profit from its
foreign subsidiary
10)A Hungarian citizen is renting a sailing boat in Croatia
11)The Hungarian Government is buying Grippen fighters from
Sweden
12)American students are studying in Hungary
Problem 3
• For each of the following changes (all other things equal),
has the value of the country’s current account balance
increased (become more positive or less negative),
decreased, or stayed the same?
• A) Net foreign investment out of the country increases
• B) Exports of goods and services increase by $10 billion, and
imports of goods and services increase by 10 billion
• C) National expenditures on goods and services (E) increase by
$150 billion, and production of goods and services increases by
$100 billion
Solution 3
• A) CA balance has to increase

• B) No change

• C) CA balance has to decrease

Problem 4
• We know the following information about a country:
• Government budget deficit is $128 billion
• Private savings are $806 billion
• Domestic capital formation is $777 billion
• What is the balance of the country’s current account?

• Hint: CA = S – Id
Solution 4
Theoretical solution
• S = Sp + Sg = private saving +
government saving = I + CA
(investment and current
account)
• Sp = Y – T – C
• Sq = T – G
Numerical solution
• Sp = 806
• Budgetary deficit = 128
• Domestic capital formation = 777
• S = Sp + Sg = 806 – 128 = 678

• CA = S – Id = 678 – 777 = (- 99)

• CA = S – Id
Problem 5 (paired transactions or double-
entry bookkeeping)
Which of the following transactions would contribute to a U.S. current account
surplus?
a) McDonald’s makes a barter trade with Russia, providing hamburgers for the Kremlin in
exchange for potatoes from Russian state farms.
b) The U.S. borrows $100 million from Kuwait to buy $100 million of Kuwaiti oil this year.
c) The U.S. sells Israel $100 million in automatic weapons, paid for with $100 million in bank
deposits.
d) The U.S. government makes a gift of $100 million to the people of Rwanda to pay for
emergency hospital care.
e) The U.S. government sells $100 million in long term bonds to Japan, is paid with bank
deposits in Tokyo, and promises to repay the loan in five years.
f) American travel agents buy Olympic Games tickets from a Chinese scalper, paying with
dollars (cash).
Problem 6
• Please form groups of approximately 3-4 students
Take few minutes to answer the following questions:
• Equation (CA= (Sp–I) + (T–G)) tells us that to reduce a current account deficit, a country
must increase its private saving, reduce domestic investment, or cut its government
budget deficit. Nowadays, some people recommend restrictions on imports from China
(and other countries) to reduce the American current account deficit.
• A) How would higher U.S. barriers to imports affect its private saving, domestic
investment, and government deficit?
• B) Do you agree that import restrictions would necessarily reduce a U.S. current
account deficit?
A hint from the previous seminar…
Discussion Questions
• How can a country reduce its current account deficit?

• Can you think of reasons why a government might be concerned about a large current account
deficit or surplus?

• National savings can be used domestically or internationally. What are the benefits for a nation
for each use of savings?

• Many developing countries have experienced depreciation in their currency during2013. Do you
think the widening current account deficit (CAD) is a reason for such depreciation? If so, explain
how the CAD influences the exchange rate?
Causes and problems of current account deficits
Thank you
for your attention!