Short free-response question

Reading the balance of payments

Unit 6
5 points
About 12 minutes

You can use a calculator on this question, just like on exam day.

A shorter question on one or two models, often with data in a table. You might calculate something like an unemployment rate, real GDP or the spending change needed to close a gap, draw a labeled graph (described in words on this site), and explain an effect. On the exam: Questions 2 and 3 of 3 in Section II; each is worth a quarter of the section score, with about 12 minutes suggested for each. A four-function calculator is allowed.

The question and its sources

The table shows selected international transactions for the country of Norvale in one year. Assume there is no statistical discrepancy in Norvale's balance of payments.

Table 1. Selected international transactions for Norvale (billions of dollars)

Item	Amount
Exports of goods	300
Imports of goods	380
Exports of services	90
Imports of services	50
Net investment income from abroad	+10
Net transfers	−20

Source: Hypothetical data

Suggested time: 12 minutes

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Part (a)

1 point

Calculate Norvale's balance of trade in goods. Show your work.

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Part (b)

1 point

Calculate Norvale's current account balance. Show your work.

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Part (c)

1 point

Based on your answer to part (b), what is the balance of Norvale's capital and financial account? Explain.

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Part (d)

1 point

Residents of other countries buy $20 billion of newly issued Norvale government bonds. Identify the account in Norvale's balance of payments where this is recorded, and whether it is a credit or a debit.

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Part (e)

1 point

Norvale's real interest rates rise relative to those in other countries. Identify the effect on the inflow of financial capital into Norvale and on the international value of Norvale's currency.

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