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Mark Holmes Professor Pope ECON 257 January 31, 2014 Problem Set #3 1.

Below is a partial table of the OECDs 2004 ranking of member countries based on their GDP per capita. Compute the ratio of GNI to GDP in each case. What does this imply about net factor income from abroad in each country? Compute the GNI rankings of these countries. Are there any major differences between GDP and GNI rankings? What do these differences imply? Indicate? Country Luxembourg Norway United States Ireland Switzerland Netherlands Iceland Austria Australia Canada Denmark Belgium United Kingdom Sweden Germany Finland Japan France Italy Greece Spain New Zealand Slovenia Korea Czech Republic Portugal Hungary Slovak Republic Poland GDP Per Person $64,843 $41,880 $39,660 $36,536 $34,740 $33,571 $33,271 $33,235 $32,643 $32,413 $32,335 $31,985 $31,780 $31,072 $29,916 $29,833 $29,173 $29,006 $27,744 $27,691 $26,018 $24,834 $21,527 $20,723 $19,426 $19,324 $16,519 $14,651 $13,089 GNI Per Person $53,299 $42,062 $39,590 $31,151 $37,638 $34,527 $31,897 $32,843 $31,462 $31,751 $32,232 $31,675 $32,470 $31,007 $28,732 $30,361 $29,739 $29,287 $27,586 $27,412 $25,672 $23,205 $21,268 $20,771 $18,314 $19,029 $15,548 $14,708 $12,511 GNI/GDP 0.821969989 1.00434575 0.998234997 0.852611123 1.083419689 1.028476959 0.958702774 0.988205205 0.963820727 0.979576096 0.996814597 0.990307957 1.021711768 0.997908084 0.960422516 1.017698522 1.019401501 1.009687651 0.994305075 0.989924524 0.986701514 0.934404446 0.987968598 1.002316267 0.94275713 0.98473401 0.941219202 1.003890519 0.955840782

Mexico Turkey

$10,145 $7,212

$9,989 $7,186

0.984622967 0.996394897

This implies that much of the GDP for a given country is a direct result from foreign firms operating within said country, and much of the GNI for a given country is a direct result from domestic firms operating with said country. The ranking between GNI and GDP do not differ much; therefore, there is most likely a positive, simultaneous relationship that exists between GDP and GNI. 2. Show how each of the following would affect the U.S. BOP. Include a description of the debit and credit items, and in each case say which specic account is affected (e.g., imports of goods and services, IM; exports of assets, EXA; and so on). a. A California computer manufacturer purchases a $50 hard disk from a Malaysian company, paying the funds from a bank account in Malaysia. Description BOP Account Account (Detail) Credit/Debit Hard disk -CA +IM, -TB -$50 imported from Malaysia Decrease in +FA -IMFA +$50 Malaysian deposits owned by U.S. firm b. A U.S. tourist to Japan sells his iPod to a local resident for yen worth $100. Description BOP Account Account (Detail) Credit/Debit iPod exported to +CA +EX, +TB +$100 Japan Increase in -FA +IMFA -$100 Japanese currency owned by U.S. tourist c. The U.S. central bank sells $500 million of its holdings of U.S. Treasury bonds to a British nancial rm and purchases pound sterling foreign reserves. Description BOP Account Account (Detail) Credit/Debit U.S. Bonds sold to +FA +EXHA +$500,000,000 British firm Pound-sterling -FA +IMFA -$500,000,000 reserves imported from Britain

d. A foreign owner of Apple shares receives $10,000 in dividend payments, which are paid into a New York bank. Description BOP Account Account (Detail) Credit/Debit Import of factor -CA +IM, -NFIA -$10,000 service New York bank +FA +EXHA +$10,000 deposits paid e. The central bank of China purchases $1 million of export earnings from a rm that has sold $1 million of toys to the United States, and the central bank holds these dollars as reserves. Description BOP Account Account (Detail) Credit/Debit Import toys from -CA -IM, -TB -$1,000,000 China Central Chinese +FA +EXHA +$1,000,000 bank buys U.S. dollars f. The U.S. government forgives a $50 million debt owed by a developing country. Description BOP Account Account (Detail) Credit/Debit Debt Forgiveness -KA +KA -$50,000,000 Decrease in +FA -IMFA +$50,000,000 assets owned by the U.S. 3. In 2010 the country of Ikonomia has a current account decit of $1 billion and a non-reserve nancial account surplus of $750 million. Ikonomias capital account is in a $100 million surplus. In addition, Ikonomian factors located in foreign countries earn $700 million. Ikonomia has a trade decit of $800 million. Assume Ikonomia neither gives nor receives unilateral transfers. Ikonomias GDP is $9 billion. a. What happened to Ikonomias net foreign assets during 2010? Did it acquire or lose foreign assets during the year? BOP = CA + FA + KA = 0 CA + KA = -FA Current account deficit is $1 billion and the capital account is in a $100 million surplus. The nancial account records nancial ows into and out of the country. In this case, the FA surplus indicates that on net, foreigners purchased more Ikonomian assets than Ikonomians purchased foreign assets. Therefore, net foreign assets for Ikonomia declined by $900 million.

b. Calculate the ofcial settlements balance. Based on this number, what happened to the central banks (foreign) reserves? The nancial account records nancial ows into and out of the country. In this case, the FA surplus indicates that on net, foreigners purchased more Ikonomian assets than Ikonomians purchased foreign assets. Therefore, net foreign assets for Ikonomia declined by $900 million. c. How much income did foreign factors of production earn in Ikonomia during 2010? Foreign factors located in Ikonomia earned $900 million. d. Calculate NFIA. -$200 million. e. Using the identity BOP + CA + FA + KA, show that BOP = 0. BOP = CA + FA + KA BOP = (TB + NFIA + NUT) + FA + KA BOP = (-$800 + -$200 + $0) + ($750 + $150) + $100 = 04 f. Calculate Ikonomias GNE, GNI, and GNDI. We know that GDP = C + I + G + (EX IM) = GNE + TB GNE = GDP - TB GNE = $9,000 - ($800) GNE = $9,800 GNI = GDP + NFIA = GNE + TB + NFIA GNI = $9,000 + (-$200) = $9,800 + (-800) + (-$200) GNI = $8,800 = $8,800 GNDI = GDP + NFIA + NUT = GNI + NUT. Because NUT = $0, GNDI = GNI GNDI = $8,800444444 4. To answer this question, you must obtain data from the Bureau of Economic Analysis (BEA), http://www.bea.gov, on the U.S. BOP tables. Go to interactive tables to obtain annual data for 2008 (the default setting is for quarterly data). It may take you some time to get familiar with how to navigate the website. You need only refer to Table 1 on the BOP accounts. Using the BOP data, calculate the following for the United States: a. TB, NFIA, NUT, and CA TB = -$375 billion (Lines 1 + 3) NFIA = +$121 billion (Lines 2 + 4) NUT = -$125 billion (Line 5) CA = -$379 billion (Lines 1 + 2 + 3 + 4 + 5) b. FA FA = +$166 billion (Lines 7 + 8)

c. Official settlements balance, referred to as U.S. official reserve assets and Foreign official assets in the United States. Ofcial settlements balance = +$398 billion (Lines 7a + 8a). d. Non-reserve nancial account (NRFA) Non-reserve nancial account = -$232 billion (Lines 7b + 8b). e. BOP. Note that this may not equal zero because of statistical discrepancy. Verify that the discrepancy is the same as the one reported by the BEA. BOP = CA + FA + KA = -$379 + $166 + $0 = -$213 Statistical Discrepancy = +$213 million.5

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