Q2. China had a $49.1 billion overal... [FREE SOLUTION]

Chapter 21: Q2. (page 451)

China had a $49.1 billion overall current account surplus in 2018. Assuming that China鈥檚 net debt forgiveness was zero in 2018 (its capital account balance was zero), by how much did Chinese purchases of financial and real assets abroad exceed foreign purchases of Chinese financial and real assets?

Short Answer

Expert verified

Chinese purchase of assets abroad exceeds the foreign purchase of Chinese assets by $49.1 billion.

Step by step solution

Balance of payment

The balance on the current account and the balance on the capital and financial account must always sum to zero because any deficit or surplus in the current account automatically creates an offsetting entry in the capital and financial account.

The balance of payment is the sum of the balance on goods and services and capital and financial accounts.

Computing balance of the financial account

The capital account balance is zero (given).

$B a l a n c e o n C a p i t a l a n d F i n a n c e A c c o u n t = B a l a n c e o n C a p i t a l A c c o u n t + B a l a n c e o f F i n a n c e A c c o u n t = 0 + x = x$

The balance of the current account is $ 49.1 (given).

$B O P = B a l a n c e o f C u r r e n t + B a l a n c e o f C a p i t a l a n d F i n a n c i a l A c c o u n t 0 = 49.1 + x x = - 49.1$

Balance on financial account

The financial account balance is the sum of Chinese purchases of financial and real assets abroad and the foreign purchases of Chinese financial and real assets.

Since the value computed in step 2 is negative, the Chinese purchase of assets abroad exceeds the foreign purchase of Chinese assets by $49.1 billion.