Econ 437 Binghamton Accounts and Payments Homework

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All directions are mentioned in word file hw1 and BEA source is attached as well.

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First HW. Covering: Definitions of International Accounts, and how they fit together. 1. I have attached Table 13-2 from the textbook, covering the Balance of Payments Accounts for 2012. I have also uploaded the news release from the BEA discussing the same data for the third quarter of 2018 (the most recent data). a. Using the data from the BEA, create a table identical to Table 13-2 from the text, but replace the 2012 figures with those from the first quarter of 2018 (the categories do not match exactly). b. From either the textbook, or the BEA release, what types of things are traded in the Current Account (and its components)? In the Capital Account? In the Financial Account? c. From the textbook, what is the theoretical relationship between the Current Account, Capital Account, and Financial Account? (I am looking for a simple algebraic statement.) d. Intuitively, why does this theoretical relationship across accounts exist? e. Do the data presented in Table 13-2 support this theoretical relationship? What about in the table you created? f. Find the term “Statistical Discrepancy” in the BEA document. What does it mean, and what is its value? 2. Consider the movement of the Current Account noted in the BEA analysis. a. Describe the movement of the Current Account between the second quarter of 2018 and the third quarter of 2018. b. Which component (or components of the Current Account appear to be most responsible for this movement? (Use the values of the components to justify your answer.) c. From the class lecture, which macroeconomic variables, if any, might explain the movement of the component(s) you highlighted in part 2b? 3. What are the macroeconomic implications of the movement in the Current Account discussed above: a. For the short run level of GDP? b. For the level of foreign borrowing? c. For the level of foreign debt? EMBARGOED UNTIL RELEASE AT 8:30 A.M. EST, WEDNESDAY, DECEMBER 19, 2018 Technical: Media: Yiran Xin Jeannine Aversa (301) 278-9546 (301) 278-9003 BEA 18-69 Yiran.Xin@bea.gov Jeannine.Aversa@bea.gov Current-Account Balance The U.S. current-account deficit increased to $124.8 billion (preliminary) in the third quarter of 2018 from $101.2 billion (revised) in the second quarter of 2018, according to statistics released by the Bureau of Economic Analysis (BEA). The deficit was 2.4 percent of current-dollar gross domestic product (GDP) in the third quarter, up from 2.0 percent in the second quarter. The $23.6 billion increase in the current-account deficit mainly reflected a $24.0 billion increase in the deficit on goods. Current-Account Transactions (tables 1-5) Exports of goods and services and income receipts Exports of goods and services and income receipts decreased $6.2 billion in the third quarter to $930.3 billion. • Goods exports decreased $7.7 billion to $421.8 billion, mostly reflecting a decrease in foods, feeds, and beverages, primarily soybeans. • Primary income receipts decreased $1.8 billion to $264.5 billion, primarily reflecting a decrease in direct investment income. An increase in portfolio investment income partly offset the decrease. For more information on direct investment income, see the box “Effects of the 2017 Tax Cuts and Jobs Act on Components of the International Transactions Accounts.” • Services exports increased $1.8 billion to $207.6 billion, mostly reflecting increases in charges for the use of intellectual property, in financial services, and in other business services, primarily professional and management services. Imports of goods and services and income payments Imports of goods and services and income payments increased $17.4 billion in the third quarter to $1,055.1 billion. • Goods imports increased $16.3 billion to $648.8 billion, mostly reflecting increases in consumer goods, primarily cell phones, in industrial supplies and materials, primarily petroleum and products, and in automotive vehicles, parts, and engines. –2– Effects of the 2017 Tax Cuts and Jobs Act on Components of the International Transactions Accounts In the international transactions accounts, income on equity, or earnings, of foreign affiliates of U.S. multinational enterprises in a period consists of a portion that is repatriated to the parent company in the United States in the form of dividends and a portion that is reinvested in foreign affiliates. At times, repatriation of dividends exceeds current-period earnings, resulting in negative values being recorded for reinvested earnings. For the first half of 2018, dividends exceeded earnings, reflecting the repatriation of accumulated prior earnings by foreign affiliates of U.S. multinational enterprises to their parent companies in the United States in response to the 2017 Tax Cuts and Jobs Act (TCJA), which generally eliminates taxes on repatriated earnings. The negative reinvested earnings in the first half of 2018 reflect the fact that U.S. parent companies withdrew accumulated prior earnings from their foreign affiliates. Preliminary statistics for the third quarter show positive reinvested earnings and lower dividends (see table below). The reinvested earnings are also reflected in the net acquisition of direct investment assets in the financial account, which was $76.8 billion in the third quarter and −$207.4 billion in the first half of 2018 (table 6). Direct Investment Earnings Billions of dollars, seasonally adjusted 2017 Direct investment earnings Dividends Reinvested earnings I 114.1 38.2 75.9 II 114.4 34.9 79.5 Sum of First Three Quarters 2018 III 120.3 55.1 65.2 IV 128.9 26.9 102.0 p Preliminary r Revised (Continues) –3– I 128.1 294.9 −166.8 II r 132.9 183.7 −50.8 III p 129.8 92.7 37.1 2017 348.8 128.2 220.6 2018 390.8 571.3 −180.5 Effects of the 2017 Tax Cuts and Jobs Act on Components of the International Transactions Accounts (Continued) For more information, see “How does the 2017 Tax Cuts and Jobs Act affect BEA's business income statistics?” and “How are the international transactions accounts affected by an increase in direct investment dividend receipts?” In addition to the repatriation of accumulated earnings, some companies made other changes to their business practices in reaction to the TCJA. For example, some insurance companies changed how they operate in response to the base erosion and anti-abuse tax (BEAT) provision of the TCJA. BEAT is a tax on certain payments from a U.S. company to a related foreign party, which can include premium payments for reinsurance. In response to the new tax, many U.S. insurance companies terminated these intracompany reinsurance contracts. As a result, premiums paid by U.S. insurers to foreign insurers in the first three quarters of 2018 were $73.9 billion, down from $98.4 billion for the same period in 2017 (table 3). Similarly, insurance services imports in the first three quarters of 2018 were $28.8 billion, down from $38.2 billion for the same period in 2017. For more information on the estimation methods used to compile insurance services, see the insurance section in “U.S. International Economic Accounts: Concepts and Methods.” Capital Account (table 1) Capital transfer receipts were $0.6 billion in the third quarter. The transactions reflected receipts from foreign insurance companies for losses resulting from Hurricane Florence. For information on transactions associated with hurricanes and other disasters, see “How do losses recovered from foreign insurance companies following natural or man-made disasters affect foreign transactions, the current account balance, and net lending or net borrowing?” Financial Account (tables 1, 6, 7, and 8) Net U.S. borrowing measured by financial-account transactions was $31.3 billion in the third quarter, a decrease from net borrowing of $153.7 billion in the second quarter. Financial assets Net U.S. acquisition of financial assets excluding financial derivatives was $132.7 billion in the third quarter following net U.S. liquidation of $199.9 billion in the second quarter. • Net U.S. acquisition of direct investment assets was $76.8 billion following net U.S. withdrawal of $68.1 billion in the second quarter. The net withdrawal of direct investment assets in the first half of 2018 reflected U.S. parent repatriation of previously reinvested earnings in response to the TCJA. For more information, see the box “Effects of the 2017 Tax Cuts and Jobs Act on Components of the International Transactions Accounts.” –4– • Net U.S. liquidation of other investment assets decreased $104.1 billion to $16.6 billion. The decrease in the net liquidation mostly reflected a decrease in the net foreign repayment of loans. • Net U.S. purchases of portfolio investment assets were $72.6 billion following net U.S. sales of $14.3 billion in the second quarter. This change mostly reflected net U.S. purchases of foreign equity and investment fund shares following net sales in the second quarter. Liabilities Net U.S. incurrence of liabilities excluding financial derivatives was $151.7 billion in the third quarter following net U.S. repayment of $63.3 billion in the second quarter. • Net U.S. incurrence of other investment liabilities was $16.9 billion following net U.S. repayment of $100.4 billion in the second quarter. This change primarily reflected net foreign provision of loans following net U.S. repayment in the second quarter. • Net U.S. incurrence of direct investment liabilities increased $105.8 billion to $122.3 billion, mostly reflecting an increase in equity liabilities. • Net U.S. incurrence of portfolio investment liabilities decreased $8.1 billion to $12.5 billion. This decrease reflected largely offsetting transactions in U.S. equity and debt liabilities. Financial derivatives Transactions in financial derivatives other than reserves reflected third-quarter net borrowing of $12.3 billion, a $4.7 billion decrease in net borrowing from the second quarter. Statistical Discrepancy (table 1) The statistical discrepancy was $93.0 billion in the third quarter following a statistical discrepancy of −$52.4 billion in the second quarter. Updates to Second Quarter 2018 International Transactions Accounts Aggregates Billions of dollars, seasonally adjusted Preliminary estimate Current-account balance −101.5 Goods balance −203.2 Services balance 69.3 Primary-income balance 60.8 Secondary-income balance −28.5 Net lending (+)/borrowing (−) from financial-account transactions −134.3 Statistical discrepancy −32.9 –5– Revised estimate −101.2 −203.1 68.5 62.3 −29.0 −153.6 −52.4 * * * Next release: March 21, 2019 at 8:30 A.M. EDT U.S. International Transactions, Fourth Quarter and Year 2018 * * * U.S. International Transactions Release Dates in 2019 Fourth Quarter and Year 2018 First Quarter 2019 and Annual Update Second Quarter 2019 Third Quarter 2019 –6– March 21 June 20 September 19 December 19 Additional Information The capital account consists of capital transfers between residents and nonresidents and the cross-border acquisition and disposal of nonproduced nonfinancial assets. Capital transfers include debt forgiveness and certain disaster-related nonlife insurance claims. Nonproduced nonfinancial assets include natural resources and contracts, leases, and licenses. Capital-account transactions are distinguished from current-account transactions in that capital-account transactions result in a change in the assets of one or both parties to the transaction without affecting the income or savings of either party. Resources • • • • • • • Stay informed about BEA developments by reading the BEA blog, signing up for BEA’s email subscription service, or following BEA on Twitter @BEA_News. Historical time series for these estimates can be accessed in BEA’s interactive data application. Access BEA data by registering for BEA’s data application programming interface (API). For more on BEA’s statistics, see our monthly online journal, the Survey of Current Business. BEA's news release schedule. More information on these international transactions statistics will be provided next month in the Survey of Current Business. More information on the international transactions accounts (ITAs) and a description of the estimation methods used to compile them is provided in U.S. International Economic Accounts: Concepts and Methods. The financial account consists of transactions between U.S. residents and nonresidents for direct investment, portfolio investment, other investment, reserves, and financial derivatives other than reserves. Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise resident in another economy. Ownership or control of 10 percent or more of the enterprise’s voting securities is the threshold for separating direct investment from other types of investment. Direct-investment transactions in the financial account include transactions in equity (including reinvestment of earnings) and debt instruments. Definitions The current account consists of transactions between U.S. residents and nonresidents in goods, services, primary income, and secondary income. Goods are physical items with ownership rights that can be exchanged among institutional units through transactions. Portfolio investment transactions consist of cross-border transactions involving equity and investment fund shares and debt securities, excluding those included in direct investment or reserve assets. Services transactions consist of transactions arising from productive activities that change the condition of the consumer or that facilitate the exchange of products and financial assets. Other investment is a residual category that includes crossborder financial instruments other than those included in direct investment, portfolio investment, financial derivatives, and reserve assets. Other-investment transactions consist of transactions in currency and deposits, loans, insurance technical reserves, trade credit and advances, and, for liabilities, special drawing rights allocations. Primary income transactions include investment income and compensation of employees. Investment income is the return on holdings of financial assets and includes direct investment income, portfolio investment income, other investment income, and income on reserve assets. Compensation of employees is income for the contribution of labor inputs to the production process. Reserve assets are those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency exchange rate, and for other related purposes such as maintaining confidence in the currency and the economy and serving as a basis for foreign borrowing. The major published components are monetary gold, International Monetary Fund (IMF) special drawing rights (SDRs), reserve position in the IMF, and other reserve assets. Secondary income consists of current transfers between residents and nonresidents. Unlike an exchange, a transfer is a transaction in which a good, service, or asset is provided without a corresponding return of economic value. Secondary income receipts and payments include U.S. government and private transfers, such as U.S. government grants and pensions, fines and penalties, withholding taxes, personal transfers (remittances), insurance-related transfers, and other current transfers. –7– Financial derivatives other than reserves consist of financial contracts that are linked to underlying financial instruments, commodities, or indicators. Transactions in financial derivatives consist of U.S. cash receipts and payments arising from the sale, purchase, periodic settlement, or final settlement of financial derivatives contracts. Transactions in financial derivatives are only available as a net value equal to transactions for assets less transactions for liabilities. A positive value represents net cash payments by U.S. residents to foreign residents from settlements of derivatives contracts (net lending) and a negative value represents net U.S. cash receipts (net borrowing). Release and update cycle Preliminary quarterly statistics for the ITAs are released in March, June, September, and December approximately 80 days after the end of the reference quarter. These statistics are updated the following quarter to incorporate new source data. Quarterly statistics are open for revision for at least the prior three years in annual updates released in June. Preliminary annual statistics are released in March along with statistics for the fourth quarter of the previous year. These annual statistics are open for revision for at least the prior three years in subsequent annual updates. Related statistics The statistical discrepancy is the difference between net acquisition of assets and net incurrence of liabilities in the financial account (including financial derivatives) less the difference between total credits and total debits recorded in the current and capital accounts. The statistical discrepancy can also be calculated as the difference between net lending (borrowing) measured from financialaccount transactions and net lending (borrowing) measured from current- and capital-account transactions. The ITAs constitute one part of a broader set of U.S. international economic accounts that, taken together, provide a comprehensive, integrated, and detailed picture of U.S. international economic activities. The international investment position (IIP) accounts are released quarterly. Financial transactions that are reported in the ITAs are one type of change in position recorded in the IIP accounts. The current-account balance is the difference between credits (exports and income receipts) and debits (imports and income payments) in the current account. The balance is a net measure of current-account transactions between the United States and the rest of the world. A positive balance indicates a current-account surplus. A negative balance indicates a current-account deficit. Statistics on direct investment and multinational enterprises (MNEs) include annual statistics on the activities of MNEs, detailed annual and quarterly statistics on direct investment, and annual statistics on new investment in the United States. Statistics on international services, released annually, include detailed annual information on trade in services and on services supplied through the channel of direct investment by affiliates of MNEs. Net lending (borrowing) measures the balance of funds supplied to the rest of the world. Net lending means that, in net terms, the U.S. economy supplies funds to the rest of the world. Net borrowing means the opposite. Net lending (borrowing) can be measured by current- and capitalaccount transactions or by financial-account transactions. Conceptually, the two measures are equal. In practice, the two measures differ by the statistical discrepancy. U.S. international trade in goods and services, released by BEA and the U.S. Census Bureau, provides monthly statistics on trade in goods and services. List of News Release Tables Table 1. U.S. International Transactions Table 2. U.S. International Trade in Goods Table 3. U.S. International Trade in Services Table 4. U.S. International Transactions in Primary Income Table 5. U.S. International Transactions in Secondary Income Table 6. U.S. International Financial Transactions for Direct Investment Table 7. U.S. International Financial Transactions for Portfolio Investment Table 8. U.S. International Financial Transactions for Other Investment –8– December 19, 2018 Table 1. U.S. International Transactions–Contin ...
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School: University of Virginia

Attached.

Balance of Payments and International Accounts

Balance of Payments and International Accounts
Insert Your Name
Name of the Institution
Instructors Name
February 2019

1

Balance of Payments and International Accounts

2

Question One
A.
Table 13.2

U.S Balance of Payment Accounts for 2018(billions of Dollars)

Current Account
1) Exports
Of which
Goods

930.3

635.25

Services

207.64

Income receipts (Primary Income)

264.52

2) Imports

1055.09

Of which
648.775
Goods
139.275
Services
Income Payments(Primary Income)
3) Net Unilateral Transfers(Secondary income)
Balance on Current Account
(1) - (2) + (3)
Capital Account
4)

205.098
-

-124.79
0.6

Financial Account
5) Net U.S acquisition of financial assets, excluding financial derivatives

132,689

of which:
Official Reserve assets

-177

Other assets

-16,577

6) Net U.S incurrence of liabilities, excluding financial derivatives

151,7...

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