International economics CURRENT ACOUNT question?

Question

a) Which of the following transactions could contribute to a British current account surplus? Explain why.

i) A French firm sells defence equipment to the British government for 250 million pounds in bank deposits.

ii) Great Britain makes a gift of $500 million to the Iraqi government to aid in reconstruction.

iii) The United States borrows 200 million pounds on a short-term basis from the British government to buy 200 million pounds in textiles from Great Britain.

Answer 1

- (i) - This will decrease surplus or will cause larger deficit (thus increase in debt) - because net export falls..

- (ii) - This will decrease surplus or will cause larger deficit (thus increase in debt) - because money (capital) will go out from country in form of unilateral transfers.

+ (iii) - This will increase surplus or will cause fall of deficit (thus decrease in debt) - because there will be increase in net factor income from abroad in a future and increase in net export now.

http://en.wikipedia.org/wiki/Current_acc...

Answer 2

a) Which of the following transactions could contribute to a British current account surplus? Explain why.

i) A French firm sells defence equipment to the British government for 250 million pounds in bank deposits.- this does not contribute to current account surplus because here the British imports and pays to the Frech .

ii) Great Britain makes a gift of $500 million to the Iraqi government to aid in reconstruction.- this is a current account receipt  of Iraq and not a capital transfer to Iraq while Brtian makes a current account payment. So this also does not contribute to Britissh current account surplus - it reduces the surplus already existing. If Iraq for its reconstruction imports equivalent worth of goods from Britain, the effect will be neutralised.

iii) The United States borrows 200 million pounds on a short-term basis from the British government to buy 200 million pounds in textiles from Great Britain.- the short term borrowing will be a capital account transaction and will have no effect on British Current Account position, but the use of this borrowing by the US to buy textiles worth will contribute to raising British Exports and to the British Current Account Surplus. The interest to be paid by the US on its borrowings will be an interest income earned by Britain and will contribute to British Current Account surplus.