Ruritania is calculating its balance of payments for the year. All transactions for the year are listed below (all amounts are expressed in US dollars). Ruritania received weapons worth $200 from the US under its military program; no payment is necessary. A Ruritanian firm exported $400 of cloth. A Ruritanian resident is paid $10 in interest on a loan to a foreigner. Foreign tourists visited Ruritania and spent $100 in traveler’s checks. Ruritanian investors invested $200 overseas and received $50 in interest on the investment that same year. A Japanese construction firm received a $150 installment payment for work done in Ruritania. Calculate Ruritania’s current account (CA) and Financial Account (FA) balances. What change in the official reserve (OR) account is implied such that the balance of payments balances?

Ruritania

Calculation of Balance of Payments for the year:

2. Current Account:

Savings from weapons $200

Export of Cloth =           $400

Interest received =           $10

Foreign tourism =          $100

Investment interest =     $50

Installment payment = ($150)

Balance in current =     $610

2. Financial Account

Foreign investment =  ($200)

3. The official reserve account:

Export of Cloth =           $400

Interest received =           $10

Foreign tourism =          $100

Investment interest =     $50

Installment payment = ($150)

Foreign investment =  ($200)

Balance in OR account $190

The official reserve account would increase by $540 and decrease by $390.  So, the change in the official reserve account is $190 balance.  Note that the $200 cost savings for weapons is not received as a foreign exchange and as such would not included in the computation of the official reserve balance.

Explanation:

The current account of a Ruritania measures the trade surplus or deficit and other income, and savings.

Ruritania's financial account deals financial assets claims and liabilities, for instance, direct and portfolio investments.

The official reserve account of Ruritania deals with the receipts and payments of foreign exchange.  It is part of the capital account.

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