Following data describe a hypothetical economy. Government expenditure $300 billion, saving $200 billion, official reserves $5 billion, net foreign investment $50 billion, net taxes $250 billion and investment $225 billion. Calculate the current account balance, the capital and financial account balance, the government sector balance, and the private sector balance.

 

Answer:

Current account balance is $225.

Capital and financial account balance is $280.

Government sector balance is - $50.

Private sector balance is -$25.

Explanation:

 Government expenditure $300 billion, saving $200 billion, official reserves $5 billion, net foreign investment $50 billion, net taxes $250 billion, and investment $225 billion.

·        The current account balance = (X-M) + NI + NT, .......... (1) where

X= exports, M = imports, and X-M = net exports

NI = net income

NT = net transfer

It is observed that domestic savings $200 is less than domestic investment $225.

Then there is a trade deficit.

Trade surplus = X-M = S + (T-G) - I

Where, I = domestic investment

S = private savings

T-G = taxes - expenditure = government savings

Then, X-M= $200 + $(250-300) - $225 = $200 - $50 - $225 = -$75

Putting X-M in (1), we get -

current account balance = -$75 + $250 + $50 = $225

where NI = net taxes = $250, and NT = net transfer = net foreign investment = $50

·        Now, capital account  = Foreign direct investment (FDI) + portfolio investment + other investment + reserve account = $50 + $225 + $5 = $280

It is to be noted that portfolio investment is the purchasing of shares and bonds. The other investment part refers to capital flows into banks or loans. This can also consist of a reserve account. Therefore, in the data, portfolio investment is not given. Other investments can include the $225 investment.

The financial account is also referred to as the capital account, in certain cases of the balance of payments. A financial account calculates the net change in the national asset ownership.

·        Government sector balance = T - G = $250 - $300 = - $50.

·        Private sector balance = S - I = $200 - $225 = - $25