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Question
Identify whether each of the following is a debit or a credit in Freedonia’s BOP and indicate where (by line number in Table 2.1 of OEM) the item would be classified.
Freedonian firms export $250 million worth of goods.
Freedonian citizen’s purchase $50 million worth of tickets on US Airways flights.
A Freedonian firm purchases a shoe factory in Mexico for $30 million.
U.S. firms earn (and repatriate) profits of $15 million from their operations in Freedonia.
Freedonia receives $5 million in foreign aid from the United States.
Freedonian citizens deposit $15 million in Chase Manhattan bank in New York.
Freedonia imports $220 million worth of goods.
Freedonian firms borrow $45 million by issuing bonds in the United States.
U.S. firms earn (and repatriate) $5 million in profits from operations in Freedonia.
The Freedonia central bank buys $10 million in U.S. Treasury bills.
1b. In the previous example, suppose that these are all of the entries in Freedonia’s BOP table. Calculate the value of errors and omissions.
1c. Using the data in problem 1, calculate Freedonia’s current account balance and its overall balance.
2. Go to the Excel file associated with this assignment and click on the BOP worksheet. That file contains data for an un-named country over the years 1985-1993. Use that data to answer all of the following questions. (Note: Values with minus signs are debits. In determining specific balance values add negative numbers (debits) to positive numbers (credits).)

2a. For all of the years in the table, calculate the trade balance, balance on goods services and income, the current account balance, the financial account balance, and the overall balance. Feel free to do the calculations on the spreadsheet.
2b. Calculate the CAB/GDP ratio in percentage terms. (Hint: use nominal GDP). Do the values that you have calculated suggest that there is any potential for problems for this country in any particular years? Why or why not? (Caution: GDP is in local currency. BOP data are in $.)

2c. Comment on any elements in the BOP table that suggest possible calls for concern for the economy (Hints: Concentrate on years 1986-1989 and be specific about the issues you identify. Focus your attention on two lines).

2d. Given the macroeconomic information at the bottom of the Excel file, is there any evidence that the potential BOP problems you identified in 2c. had any impact on the macro economy of this country? Be specific. I am looking for no more than 2 sentences.

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