Question

Alpha’s balance-of-payments data for 2020 are shown below. All figures are in billions of dollars. What are the (a) balance on goods, (b) balance on goods and services, (c) balance on the current account, and (d) balance on capital and financial account?

Short answer

1. Balance on goods is 10.

2. Balance on goods and services is 15.

3. The balance on the current account is 20.

4. Balance on capital and financial account is -20.

Step-by-step solution

Balance of current account and capital & financial account

A country’s trade balance on goods and services is the difference between its exports and its imports of goods and services.If exports exceed imports, its trade surplus, and if imports exceed exports, its trade deficit. By adding all transactions to the current account, one can compute the balance on the current account.

Similarly, the balance of trade on capital accounts and financial accounts can be defined. The net balance of payment of a country is the sum total of balance on goods and services and capital and financial accounts.

Balance on goods

Balance on Goods = Goods export + Goods import

= 40-30

= 10

The balance on goods is in surplus.

Balance on goods and services

The balance on goods is 10. The balance on services can be computed in the following manner:

Balance on Services = Services export + Services import

= 15 - 10

= 5

Thus, the balance on goods and services is 10+5= 15.

Balance on current account

The balance on the current account includes net investment income and transfer along with the balance of goods and services. It is computed as follows:

$$\begin{gathered} Balanceoncurrentaccount=BalanceoGoodsandServices+NetInvestmentIncome+NetTransfer \\ =15-5+10 \\ =20 \end{gathered}$$

Balance on capital and financial account

$$\begin{gathered} Balanceoncapitalandfinanceaccount=Balanceoncapitalaccount\left(BOC\right)+Balanceoffinanceaccount \\ =BOC+ForeignpurchaseofAlphasets+Alphapurchasesofassetsabroad \\ =0+20-40 \\ =-20 \end{gathered}$$

Thus, the balance on capital and financial account is -20, which shows it is in deficit.