Book Title
International Economics: Theory and Policy 9th Edition

978-0132146654 Chapter 13 Solution Manual

December 18, 2019
1. The reason for including only the value of final goods and services in GNP, as stated in the question,
is to avoid the problem of double counting. Double counting will not occur if intermediate imports
2. Equation 13-2 can be written as CA (SpI) (TG). Higher U.S. barriers to imports may have
little or no impact upon private savings, investment, and the budget deficit. If there were no effect on
these variables, then the current account would not improve with the imposition of tariffs or quotas.
3. a. The purchase of the German stock is a debit in the U.S. financial account. There is a
b. Again, there is a U.S. financial account debit as a result of the purchase of a German stock by an
American. The corresponding credit in this case occurs when the German seller deposits the U.S.
check in its German bank and that bank lends the money to a German importer (in which case the
c. The foreign exchange intervention by the Korean government involves the sale of a U.S. asset,
the dollars it holds in the United States, and thus represents a debit item in the U.S. financial
d. Suppose the company issuing the traveler’s check uses a checking account in France to make
e. There is no credit or debit in either the financial or the current account since there has been no
f. There is no recording in the U.S. Balance of Payments of this offshore transaction. 4.
If the transaction is in cash then the corresponding debit for New Jersey and credit for New York
also show up in their financial accounts. New Jersey acquires dollar bills (an import of assets
from New York, and therefore a debit item in its financial account); New York loses the dollars
(an export of dollar bills, and thus a financial account credit). Notice that this last adjustment is
analogous to what would occur under a gold standard (see Chapter 18).
Chapter 13 National Income Accounting and the Balance of Payments    64
5. a. Since non-central bank financial inflows fell short of the current account deficit by $500 million,
b. By dipping into its foreign reserves, the central bank of Pecunia financed the portion of the
country’s current account deficit not covered by private financial inflows. Only if foreign
c. If foreign official capital inflows to Pecunia were $600 million, the central bank now increased
its foreign assets by $100 million. Put another way, the country needed only $1 billion to
d. Along with non-central bank transactions, the accounts would show an increase in foreign official
reserve assets held in Pecunia of $600 million (a financial account credit, or inflow)
6. A current account deficit or surplus is a situation which may be unsustainable in the long run.
There are instances in which a deficit may be warranted, for example to borrow today to improve
The reserves of foreign currency held by a country’s central bank change with nonzero values of its
official settlements balance. Central banks use their foreign currency reserves to influence exchange
rates. A depletion of foreign reserves may limit the central bank’s ability to influence or peg the
exchange rate. For some countries (particularly developing countries), central-bank reserves may
7. The official settlements balance, also called the balance of payments, shows the net change in
international reserves held by U.S. government agencies, such as the Federal Reserve and the
Treasury, relative to the change in dollar reserves held by foreign government agencies. This account
provides a partial picture of the extent of intervention in the foreign exchange market. For example,
Chapter 13 National Income Accounting and the Balance of Payments    65
8. A country could have a current account deficit and a balance of payments surplus at the same time
if the financial and capital account surpluses exceeded the current account deficit. Recall that the
balance of payments surplus equals the current account surplus plus the financial account surplus plus
the capital account surplus. If, for example, there is a current account deficit of $100 million, but
there are large capital inflows and the financial account surplus is $102 million, then there will be a
$2 million balance of payments surplus.
9. If both assets and liabilities pay 5%, then the net payments on the net foreign debt would be 1.25%.
While not trivial, this is probably not too bad a burden. At 100% net foreign debt to GDP ratio, the
10. The U.S. receives a substantially higher rate of return on its assets held abroad than foreigners are
11. The case study states that U.S. foreign assets are equal to 129% of GDP and foreign liabilities are
equal to 148% of GDP. Furthermore, 70% of U.S. foreign assets are in foreign currencies and 100%
12. To incorporate capital gains or losses, one would have to consider these valuation changes part of
national income. We would thus change Equation 13-1 to read:
13. The 2009 U.S. net international investment position with direct investment valued at current costs is
$3,493,882 million. To find the net international investment position with direct investment valued
at market prices, we simply subtract the value U.S. direct investment abroad at current cost and add
the value of U.S. direct investment abroad at market prices. Then add the value of foreign direct
investment in the United States at current cost and subtract the value of foreign direct investment
at market prices:
Chapter 13 National Income Accounting and the Balance of Payments    66
Christopher Bach, “U.S. International Transactions, Revised Estimates for 1982–1998,” Survey of Current
Business, 79 (July 1999):60–74.
“The International Monetary Fund’s New Standards for Economic Statistics,” Survey of Current Business,
76 (October 1996):37–47.