Question

At the beginning of 2014 Country A's Net International Investment Position is - at book (or accounting) value - equal to $0. During 2014 Country A's residents purchase shares in Country B's stock market for $500, and Country A's government sells treasury bonds to Country B's residents for $500. Country A's Current Account Balance in 2014 and 2015 is 0, and no other financial account entries are recorded in Country A's balance of payments. At the end of 2015, however, Country B's shares owned by Country A residents have increased their value by 10%, while the Country A's treasury bonds owned by Country B's residents have lost 5% of their original market value. What is the market value of Country A's Net International Investment Position at the end of 2015

Answer 1

The current account balance can be calculated using the national saving and investment identity formula. If investment rises by $50 billion while the budget deficit and national savings remain the same, the current account balance would decrease by $50 billion.

Step-by-step explanation:

The current account balance can be calculated using the national saving and investment identity formula:

Current Account Balance = National Savings - Domestic Investment.

In this case, the government budget deficit of $100 billion and total domestic savings of $1,500 billion are given.

Therefore, the current account balance would be $1,400 billion ($1,500 billion - $100 billion).

If investment rises by $50 billion while the budget deficit and national savings remain the same, the current account balance would decrease by -

= ($1,400 billion - $50 billion).

= $50 billion

Answer 2

$50; $550; $25; $475; $75

Step-by-step explanation:

Increase in value:

= Investment made × Percentage change

= (500 × 10) ÷ 100

= 50

Thus, the increase in value of country A is $50.

New value = Original value + Increased value

= $500 + $50

= $550

Therefore, the new value of country A's investment in a foreign country at the end of 2015 is $550.

(b) The value of foreign country's investment in country A has decreased to 5%.

Decrease in value = Original value × Decreased value

= (500 × 5) ÷ 100

= 2,500 ÷ 100

= 25

Therefore, decrease in value of country A is $25.

New value = Original value - Decreased value

= $500 - $25

= $475

Thus, the value of foreign countries invests in the country A at the end of 2015 is $475.

Net international investment position:

= (value of country A's investment in a foreign country at the end of 2015) - (value of foreign countries investment in the country A at the end of 2015)

= $550 - $475

= $75

Thus, the market value of the country A's net international investment position at the end of 2015 is $75.