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Problem 1: Valuation effects on net foreign assets We consider two fictitious economies A and B with the following balance sheet on foreign assets and liabilities. Assets and liabilities are expressed in the countries domestic currency and their currency composition is written in parenthesis. For the whole exercise, GDP in domestic currency is constant in both countries. 1. Compute the net foreign asset position for these two countries. Suppose that the foreign currency appreciates by 10% over a year. 2. Provide the balance sheet on foreign assets and liabilities of both countries, assuming a zero current account balance over this period. Compute the net foreign asset position one year after. What is the size of the capital gains and losses on the NFA over this period for both countries? 3. What would be the NFA one year after if the countries had run a current account deficit of 2% of GDP over the period? Decompose the change in NFA over the period between the current account balance and the valuation effects on the NFA (all expressed in \% of GDP). 4. How did valuation effects help to stabilize the external positions of these countries? Problem 1: Valuation effects on net foreign assets We consider two fictitious economies A and B with the following balance sheet on foreign assets and liabilities. Assets and liabilities are expressed in the countries domestic currency and their currency composition is written in parenthesis. For the whole exercise, GDP in domestic currency is constant in both countries. 1. Compute the net foreign asset position for these two countries. Suppose that the foreign currency appreciates by 10% over a year. 2. Provide the balance sheet on foreign assets and liabilities of both countries, assuming a zero current account balance over this period. Compute the net foreign asset position one year after. What is the size of the capital gains and losses on the NFA over this period for both countries? 3. What would be the NFA one year after if the countries had run a current account deficit of 2% of GDP over the period? Decompose the change in NFA over the period between the current account balance and the valuation effects on the NFA (all expressed in \% of GDP). 4. How did valuation effects help to stabilize the external positions of these countries