Question

In the economy of Scottopia in 2014 , exports equaled \(\$ 400\) billion of goods and \(\$ 300\) billion of services, imports equaled \(\$ 500\) billion of goods and \(\$ 350\) billion of services, and the rest of the world purchased \(\$ 250\) billion of Scottopia's assets. What was the merchandise trade balance for Scottopia? What was the balance of payments on current account in Scottopia? What was the balance of payments on financial account? What was the value of Scottopia's purchases of assets from the rest of the world?

Short answer

The merchandise trade balance is \(-100 \text{ billion}\), the balance of payments on the current account is \(-150 \text{ billion}\), the balance of payments on the financial account is \(250 \text{ billion} \), and the value of Scottopia's asset purchases cannot be determined.

Step-by-step solution

Calculate the Merchandise Trade Balance

To find the merchandise trade balance, subtract the value of imports of goods from the value of exports of goods. So, the merchandise trade balance is \(400 \text{ billion} - 500 \text{ billion} = -100 \text{ billion}\).

Calculate the Balance of Payments on Current Account

The current account includes the trade balance of goods and services. It is calculated by adding the balance of goods and services. So, add the trade balances together: \(400 \text{ billion} + 300 \text{ billion} - 500 \text{ billion} - 350 \text{ billion} = -150 \text{ billion}\).

Calculate the Balance of Payments on Financial Account

The financial account measures the change in international ownership of assets. The balance of payments on the financial account for Scottopia is the net value of the rest of the world's purchase of Scottopia's assets, which is \(250 \text{ billion}\).

Value of Scottopia's Purchases of Assets from the Rest of the World

As there is no information regarding Scottopia's purchases of assets from the rest of the world, it cannot be determined from the given data.

Key concepts

Merchandise Trade Balance

The merchandise trade balance reflects a country's balance between its exports and imports of goods. It is one of the key indicators of a nation's economic activity and is used to gauge the performance of a country in international trade. For Scottopia, the merchandise trade balance was calculated by subtracting its goods imports (\$500 billion) from its goods exports (\$400 billion), resulting in a negative balance of \( -100 \text{ billion} \). A negative merchandise trade balance indicates that Scottopia imported more goods than it exported, implying a trade deficit in terms of merchandise.

A critical point to note is that a persistent trade deficit could lead to a buildup of debt, as the country may need to borrow money from abroad to finance its imports. On the other hand, a trade surplus could indicate a strong exporting sector but may also suggest that the domestic market is not absorbing the country's production, possibly signaling other economic issues.

Current Account

The current account is a broader measure that includes the merchandise trade balance and expands it to include the trade in services and other income. It reflects the net amount of a country's income if it is in surplus, or expenditure if it is in deficit, vis-à-vis the rest of the world. In the case of Scottopia, the current account balance considers not just the merchandise trade, but also the service exports (\$300 billion) and imports (\$350 billion). The calculation provided a negative balance of \( -150 \text{ billion} \), indicating that Scottopia had a deficit on its current account.

When a country has a current account deficit, it means it is using more resources from the rest of the world than it is providing. This may result from investing in domestic industries expecting future growth or consuming more than the country produces. It also implies that the nation must finance this deficit through borrowing or attracting investment from abroad.

Financial Account

The financial account is a component of the balance of payments that records all transactions that involve a country's change of ownership of international assets. It includes investments in financial assets across borders and loans between countries. For Scottopia, the balance of payments on the financial account was identified as the net value of the rest of the world's purchase of Scottopia's assets, which amounted to \( 250 \text{ billion} \). This indicates that Scottopia attracted a considerable amount of foreign investments.

It's essential to understand that a surplus in the financial account usually coincides with a deficit in the current account, as seen in Scottopia's case. This relationship occurs because if a country spends more on foreign goods than it earns from its exports, it must finance the excess spending by either running down its reserves or by receiving capital from other countries, commonly through asset sales.

International Trade

International trade refers to the exchange of goods and services between countries. It is driven by economic differences between nations, varying in resources, labor, and technology. Scottopia's international trade involved both goods and services, with exports totaling \( 400 \text{ billion} \) in goods and \( 300 \text{ billion} \) in services, while imports consisted of \( 500 \text{ billion} \) in goods and \( 350 \text{ billion} \) in services. The overall interplay of these exports and imports shapes Scottopia's engagement with the global economy.

Participation in international trade allows countries to specialize in specific sectors where they have a comparative advantage, leading to more efficient global resource utilization. However, it also contributes to the complexity of balancing a country's payments, as trade influences the domestic economy's size and stability.

Macroeconomics

Macroeconomics studies the behavior and performance of an economy as a whole. It encompasses various economic indicators, including those related to the balance of payments like the merchandise trade balance, the current account balance, the financial account, and patterns of international trade. Understanding macroeconomics helps in making sense of the broader implications of these indicators on a country's economic well-being. For Scottopia, analyzing their merchandise trade balance, current account, and financial account depicts a macroeconomic snapshot of their economy's international position.

In macroeconomic terms, a country with a deficit in its current account might be living beyond its means, while a surplus could indicate a strong competitive position internationally. Macroeconomic policies, including monetary and fiscal policies, are often designed to address such deficits or surpluses to steer the economy toward optimal performance and stability.