National Accounting, the Balance of Payments 1. In 2019, US GNP was $210 while GDP was $204. The trade deficit was 3% of GDP. Compute the Current Account balance and Domestic Absorption. Was the Current Account in surplus or in a deficit? Compute the Net Factor Payment. Did US residents generate more income abroad than what foreign residents generated within the US? 2. The world consists of only 3 countries: the US, Canada, and Mexico. In 2022, the Current Account balances of the US and Mexico were 20 and 5, respectively. Assume Capital Accounts were balanced for all 3 countries. What is the balance of Canada's Current Account? What are the balances of the Financial Accounts of all 3 countries? 3. How will the US Balance of Payments reflect the following transactions? List only account names (CA, FA, KA) and whether the record is credit (+) or debit (). (a) Jake, a US resident, sells his shares in BNF Paribas (a French bank) to his long-time business partner Igor, a Bulgarian citizen. Igor pays for the shares with a wire transfer from his deposit account with Chase, as US bank. (b) Francois, a Canadian citizen, worked for a small FinTech startup in Manhattan, for 3 months, as a consultant. He was paid with a check, which he deposited promptly into his Canadian bank account. (c) Paul, a day trader from Maine, sells his portfolio of US Treasury bills to a fixed income spedialist working for Wells Fargo, a US bank. (d) US Semiconductors Inc. makes highly specialized circuitry for missile guidance systems. They import copper from Chile, buying it from their long-time supplier there, paying with a bank transfer the same day. (e) The US government contracts a famous Italian architecture firm to design a new foot bridge over the Potomac. The US government pays for these design services via wire transfer. (f) The US government extended an emergency loan to the government of New Zealand a few years ago. Due to worsening economic conditions in New Zealand, it is clear to all that the government there will be unable to pay back the loan as scheduled, so the US government decides to forgive the debt. Principal or interest payments are no longer due. The Ricardian Model (2 Countries 2 Goods) The world consists of two countries, Home and Foreign. All Foreign quantities and prices are marked with an asterisk (+). There are only two sectors, Cheese and Wine. All markets are competitive and Labor is the only factor of production, supplied inelastically. Production is linear, determined by unit labor requirements. For the data provided below, answer the following questions: Consumers spend on Cheese twice as much as they spend on Wine, at any prices. (F.D, = 2P, D). - 5 Unit Labor Requests Country Cheese Wine Labor Force Home =3 apy =2 L=12 Foreign aj. =1 =1 L*=5 . Plot the PPF of the Home country, with the Cheese output on the horizontal axis. Label intercepts and slopes with both symbols and numerical values. . Describe the pattern of absolute and comparative advantage. . Construct and plot the world Relative Supply schedule, using the relative price of Cheese on the vertical axis. Use the provided information on consumers\" spending habits to add the world Relative Demand curve on the diagram, and find the equilibrium. . Describe the pattern of production and trade under free trade. Describe the welfare consequences of opening up to trade, if the two countries were previously in autarky. Which country has higher wages? Can you compute exactly how much higher? The Specific Factor Model Consider the Specific Factor Model studied in class: there is one country, a small open economy that takes commodity prices as given, on World markets. There are two goods, Agriculture (A) and Manufacturing (M). All markets are competitive. Production exhibits diminishing return to labor. Manufacturing requires capital (K} and labor (L) while Agriculture requires land (T) and labor (L). Workers are free to move between sectors but capital and land are specific to their sectors. 1. Construct a diagram to showcase the relation between the value of the marginal product of labor in the two sectors and the wage. Put the size of the labor force L on the horizontal axis. . Use your diagram to study the consequences of a drop in the price of Manufacturing on World markets for (a) the share of workers emploved in Agriculture, (b) the nominal and real wages of workers, (c) the welfare of workers, (d) the welfare of capitalists (capital-owners), and (e) the welfare of land-owners