( ____/

25

)

The Balance of Payments

(BOP) measures all international transactions between two countries.

The chart below shows six different transactions between the US and China

United States

China

Purchased $800 of goods and services

Sent $100 of humanitarian aid

Americans spent $200

in Chinese stock market

American tourists spend $1000 in China

Chinese tourists spend $1000 in the US

Purchased $300 of goods and services

Chinese purchased a $6

00 business in the US

Chinese government purchased US. bonds

a.

Which country has a trade defic

it

and which has a trade surplus? Explain how you got your answer

and calculate the value of each

( ____/5)

b.

Assuming these are all the transactions between these two countries, calculate the value of the

current accounts for each country. Explain why one w

ill have a current account deficit and the other

will have a current account surplus.

( ____/5)

c.

Calculate the dollar value of US bonds held by the Chinese government. Explain how you

determined your answer. Identify the relationship between financial inflo

ws and outflows for each

country

( ____/5)

d.

Assume that China experience significant inflation compared to the US. In general, explain what

would likely happen to the current accounts for each country and the value of each country's

currency? ( ____/5)

e.

Ass

ume

instead that

the interest rate increase in China compared to the US. In general, explain what

would likely happen to financial accounts for each country and the value of each country's currency?

( ____/5)