Balance of Payments Calc

Section 19, Econ Problem #6

Based on the information provided by the sell-side Analyst for Bricania’s trade, private sector, and gov expenditures, including Exhibit 1, which of the following satements is most likely correct:

Exhibit 1:

Gov expense for defense, public structures: 4500

Net tax receipts: 12,387

Expenditures: 14673

Surplus (deficit): (2,286)

Private Sector Savings: 11,398

Private Sector Investment: 12,265

Surplus (deficit): (867)

Exports: 6,203

Imports: 9,356

Surplus (deficit): 3,153

Answer: Bricania’s (country) international borrowing is financing private and public investment, not consumption. Goverment plus private investment (4500 + 12265) total more than net internation borrowing of 3,153. Net international borrowing is equal to the current account deficit (imports less exports) because the official settlements account balance is zero.

How did they draw this conclusion that international borrowing is financing private and public investment and not consumption?

The deficits in govt and pvt. sector are coming from trade deficit which was financed by capital inflows. Indirectly the capital inflows financed govt and pvt investment and not consumption.