Summer (i) 2021                                                                                                                                                                                                         Exercise 4

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Name:

Exercise 4 Score:

                        Individual: (-                  = +  /15

                        Class: (-                            = +   /10

                        Total:  (-                           = +   /25

Provide answers to each of the following questions.  (25 points:  15 points individual; 10 points (bonus) class, if each question answered in good faith)

Answer each of the questions below in the “Answer” spaces, making sure your answers appear in blue.  (This will happen automatically if you answer in the correct space!  Answers outside of the answer spaces will not be marked.)

1.                    Question #1 Score:  (-   =+  /3

Consider each of the hypothetical U.S. Balance of Payments (primary) current account transactions shown in (a), (b), and (c) below, identify whether it is an Export, Import, Factor Payment (R), or Unilateral Transfer (U).  And whether it represents a payment inflow or payment outflow. 

Then, for each of the balancing financial account transactions, shown in (a)’, (b)’, and (c)’ below, identify:

  • If the transaction corresponds to the U.S. Assets Abroad account or to the Foreign Assets in U.S. (U.S. Liabilities to Foreigners) account; and
  • If the transaction represents a payment inflow or payment outflow.  Remember, in the U.S. assets abroad account, an acquisition of a foreign asset is an outflow; a sale of a foreign asset, an inflow.  In the Foreign assets in U.S. (U.S. liabilities to foreigners) account, a purchase of a U.S. asset by a foreign entity is an inflow; a sale of a U.S. asset by a foreign entity, an outflow.  (3 points; 0.6 points per segment)

Note:  The first two are done for you.

  • A German importer purchases a $2000 case of  U.S. wine from a distributor. (-0)

Answer:  Export; payment inflow

(a)’                For payment, a U.S.  bank makes a $2000 loan to the German wine importer.  (-0)

                                                Answer:  U.S. Assets abroad . (Foreign liabilities to U.S.);  payment outflow

  • A U.S. tourist spends $3000 on room and board in Germany.    (Note:  spending by U.S. nationals on tourism abroad is recorded as an import of a service; foreign tourism expenditures in U.S. are recorded as exports of a service.) (-

Answer:

(b’)                To make payment, the tourist’s bank in the U.S. draws down its deposits at a bank in Germany by $3000. (-

                                                Answer:

  • A German university student studying in New York deposits at a local U.S. bank a $5000 U.S. bank check received from her parents living in Munich.. (-

Answer:

(c’)                To make payment (on the $5000 check, of course), the German bank draws down $5000 from its account at a bank in the U.S.(-

                                                Answer:

  • Compute the current account balance. (-

Answer:

  • Compute the financial account balance. (-

Answer:

Note:  to compute answers to each of the above, it might help to fill in the Table below from those current account and financial account balancing transactions above, placing the letter of the transaction next to the appropriate entry.   (You do not have to do this, however.)

                        Current Account

Inflows                             Outflows

Exports

Imports    

Factor Payments(R)

Unilateral Transfers (U)                                                                                                                                        

___________________________________________________________________________________________

Sum                                                                                                                                                            

                        Financial Account                                                                            Inflows                             Outflows

U.S.  Assets Abroad                                                   

Foreign Assets in the U.S.

(U.S. liabilities to foreigners)                             

                        ______________________________________________________________________________________________

Sum

2.                    Question #2 Score:  (-   =+  /3

The Table below provides hypothetical data on macroeconomic accounts for three countries represented by A, B, and C, and measured in billions of currency units.  S = private household saving; T = taxes; G= government spending; and I = investment.  (Assume R and U = 0.)  (3 points; as indicated)

 ABC
S700050007000
T300050005000
G600035006500
I800040004500
  • Calculate the Current Account balance for each country.  (Remember, the current account balance = (X – M), since  we’re assuming that R and U = 0.  And

(X-M) = National Saving – I, where National Saving = Public Saving (T-G) + S.  (1 point) (-

Answer:                            Country A                                                Country B                                                Country C

  • State whether each nation has a current account surplus or deficit.  (1 point) (-

Answer:                            Country A                                                Country B                                                Country C

  • So which nation(s) have positive foreign saving?  (0.5 points) (-

Answer:

  • Which nation(s) have positive foreign investment? (0.5 points) (-

Answer:

3.                    Question #3 Score:  (-   =+  /3

The annual (since 1999) U.S.  Balance of Payments (now called International Transactions) as a whole, is available on FRED at the following address:

https://fred.stlouisfed.org/release/tables?rid=49&eid=4&od=1999-01-01#

Note: the command sequence to access these data from the FRED home page is

Releases > U.S. International Transactions > Table 1.2. U.S. International Transactions, Expanded Detail

By clicking on the Table title “Table 1.2  U.S. International Transactions, Expanded Detail,” you can also access quarterly data.  Here, however, we’re only concerned about annual data. 

Using these data, you’re to fill in the Balance of Payments table below that is virtually identical to the one we presented in class.  (In other words, you’re “converting” real-world data into the format you learned in class and found in the Week 4 Power Point slides.)  (3 points; 0.6 points per segment)

(a)                  What was the 2020 U.S. current account balance in billions of dollars? (line #101)  Enter this number into line (a) in the table below.  (The numbers in the BEA table are in millions, so change the “,” to a “.” to express this value in billions of dollars.)

The U.S. Bureau of Economic Analysis (BEA) also includes “capital account” transactions, which are  payments for mineral rights, debt forgiveness, sports franchises, trademarks, and so on.  As these payments work just like those in the current account, we treat them the same way.  You’ll see that the negative 2020 “capital account” balance figure is entered for you in the table below. So your task is to add this small balance on the capital account to the current account balance you provided in (a) and enter that sum into the (a)’ placeholder.

(b)                 What was  the 2020 “Net U.S. acquisition of financial assets (excluding financial derivatives) in billions of dollars (line #61)?   (Note:  Net acquisition means purchases by U.S. nationals of foreign assets less sales by U.S. nationals of foreign assets.)  Enter this number into line (b) in the table below, placing a negative sign in front of it.

                        Note that a positive number here is, as we showed in class, actually a negative financial outflow. That’s why we place a negative sign in front of this number.  (The BEA figures shows the net dollar increase in U.S. assets, not the actual financial flows.  Yes, this is tricky, but that’s how they do it.  Economists do not appreciate this approach!)

(c)                  Referring to these same data, what was “Net U.S. incurrence of liabilities excluding financial derivatives” in billions of dollars (line #84)? Note:  Net incurrence of liabilities means purchases by foreigners of U.S. assets less sales by foreigners of U.S. assets.)  Enter this number in line (c) in the table below.

Note that here a positive number is a positive financial inflow.  So leave the entry as a positive number.

Note:  BEA data include separate net values for financial derivative contracts (forward contracts and the like).  The accounting is the same as that of an asset in the financial account.  Since, however, the BEA shows asset increases as positive numbers and asset decreases as negative numbers (see (b) above), we must change the sign that precedes the actual figure as we did in (b). Therefore, you’ll find the 2020 derivative balance in billions of dollars already entered into the Table as a positive number, which meansthat net outstanding derivative contracts in 2020 decreased, which is in inflow (net).

(d)                 Compute the Financial Account balance in billions of dollars by adding the plusses and subtracting the minuses in the Financial Account, which, in our case, include the derivatives balance.  Enter this number in line (d) in the table below.        

(e)                  Calculate the balance of the Balance of Payments, i.e., the sum of the negative (Current Account  + Capital Account) Balance and positive Financial Account balance (including derivative contracts) in billions of dollars and enter it in line  (e) in the table below.   

The (-) of this number, your answer (e), is known as the “statistical discrepancy.”  So place the negative of your answer to (e) in line (f) in the Table below.  (Allowing for rounding error, your computed statistical discrepancy should pretty much equal the “Statistical discrepancy” entry (line #100) found in the BEA table.  Does it?)

So there you have it.  You’re now able to read the U.S. Balance of Payments!  This is an important exercise, as many of you in your professional lives will access balance of payments data, not just for the U.S., but for other countries as well.  Formats vary somewhat, however.  So you’ll have to learn to adapt what you’re learning to different data settings.  That is a core skill to be mastered over time.  If you completed this exercise correctly, you’re halfway there.

ItemBalance = (inflows – outflows) (billions of dollars)
  Current Account Balance   Capital Account Balance      
(Current + Capital Account )Balance
  ______________________ (a) (-       $-6. 030  (filled in for you) ————————————————–   _____________________ (a’) (-  
Financial Account            U.S.  Assets Abroad            U.S. Liabilities to Foreigners  
                   Net Change in Derivative Contracts       Balance on Financial Account (including derivative contracts)
    ______________  (b)  (net outflow of resources shown by (-)) (-     ______________   (c)  (net inflow of resources shown by (+)) (-    $3. 297 (filled in for you)         ________________________(d) (-  
    Balance on Balance of Payments  Sum of (-) (Current Account + Capital Account) Balance and (+) Financial Account Balance, including derivatives)          ___________________________ (e) (-  
    Statistical Discrepancy               ____________________ (f) (-

4.                    Question #4 Score:  (-   =+  /3

FRED Exercise

Current Account

Since international capital flows is our topic this week, as promised, your first task is to graph the recent evolution of the quarterly U.S. Current Account Balance (National Accounts basis) as a percentage of GDP from Q1 1960 through Q1 2021

For this exercise, you must create the current account/GDP ratio yourselves by first accessing the quarterly, seasonally adjusted annual rate Current Account Balance (National Accounts basis) series, FRED code = NETFI.   (Make sure this is the quarterly series.)  Then, while in “Edit Line 1,” type in “GDP” in the dialog box labeled “You can begin by adding a series to combine with your existing series.”   Among the available series options, scroll down to find “Gross Domestic Product Quarterly Billions of Dollars Seasonally Adjusted Annual Rate.”  (Careful. You do not want to upload “Real Gross Domestic Product ….”   Click on the correct series; then click on “Add.”  You should now have two series, “a” and “b.”  Finally, simply transform the series by computing the ratio of the Current Account Balance) to GDP, expressing it as a percentage.  So if series “a” = current account; series “b,” GDP, then you’d enter “(a/b)* 100” into the series transformation box.  (3 points; as indicted)

(i)                   Print out this graph and attach it.     (1.0 point) (-

(ii)                 What is the Q1 2021 value of this ratio, rounded to 2 decimal places?  (.5 points)  (-

(iii)                For the most part, excluding oil-price shocks (1973, 1980) and our current Pandemic recession, what happens to the Current Account Balance as a percentage of GDP during recessions?  Why do you think that is the case?   (1 point) (-

(iv)                Why do you think the current-account balance number has behaved differently that in other non-oil-price shock recessions? (.5 points) (-

5.                    Question #5 Score:  (-   =+  /3

FRED Exercise               U.S. Net International Asset (Investment) Position/GDP

First, call up the series of the quarterly evolution of the U.S.’s net international asset position (FRED Code = IIPUSNETIQ) since the beginning of the series through Q4 2020.

Note: these data are expressed on the graph as millions of dollars. So a value, say, of $4,375,257million dollars =$4,375.257 billion = $4.375275 trillion. (You do not have to print out (or attach) this graph.  This is but an intermediate step.)  (3 points, as indicated)

(i)       What is the Q4 2020 value of the U.S.’s net international asset position in trillions of dollars with two decimal places? (.5 points) (-

            Now calculate the net international asset position as a percentage of quarterly annualized GDP.  While not difficult, it’s a bit tricky, since the net international asset position data are expressed in millions of dollars.

So, as in question #4, add the quarterly seasonally adjusted annual rate GDP data set (Fred code = GDP ) to your original Net International Asset position graph, while in edit “Line 1.”  (Again, make sure you add the correct quarterly nominal (not real) GDP series.  As before, when you type in “GDP,” you’ll have to scroll down to find the correct quarterly seasonally adjusted annual rate GDP series.)

Then you’ll want to do your own transformation of your two data sets, “a” and “b.”  (Note that “a” is the U.S.’s net international asset position; “b” is nominal GDP.)  How should you transform the series?  Use the following simple expression:

“(a/1000 )/ b*100” 

(This converts million to billions for series (a) and then takes the fraction of the converted-to-billions “a” series to the “b “series) and expresses the result as a percentage..)

The result is a graph depicting the evolution of the U.S.’s net international asset position as a percentage of GDP.  (Note:  our quarterly net international asset data are not seasonally adjusted; whereas our quarterly annual rate GDP data are.)

(ii)     Print out this graph and submit it.  (1 point) (-

(iii)    What is the Q4 2020 value of this measurement.  (Express as a percentage, of course, rounded to three decimal points.)  (.5 points) (-

(iv)    Is the evolution of this ratio to date during the pandemic recession similar to that during of the Great Recession? What do you think will be the trajectory of this ratio over the next few years?  Why? (1 point) (-

6.                    Extra Credit  (FRED Exercise) (Current Account / GDP  for Germany and Japan) (2 points) (+

You might find it interesting using FRED to graph the ratio of the current-account balance to GDP (CA/GDP) for Germany and Japan.  On your own, search for the balance of payments as a percentage of GDP data for Germany and Japan.  Plot each series as a separate line in the same graph from the beginning of the available data for each series through Q4 2020.  Insert your graph in the space below.  (1 point) (+

So how would you describe the general evolution of the CA/GDP ratio for these two countries?  How are they similar?  How do they differ?  (0.5 points) (+

Answer:

Before the pandemic, many economists argued that Germany was the EU’s problem child whose macroeconomic policies jeopardized the Union itself.  What might the evolution of the CA/GDP ratio have to do with this view?  What do you think economists would recommended that Germany do?   Might this be more difficult after the pandemic?  Explain.  (0.5 points)  (+

Answer:

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