Answer to Question #209142 in Macroeconomics for Tom

Question

In 2016, Iceland a Nordic island country has a current account deficit of $1 billion and a

non-reserve financial account surplus of $750 million. The capital account is in a $100

million surplus. Additionally, Iceland’s factories located in foreign countries earn $700

million. Iceland has a trade deficit of $800 million. Assume Iceland neither gives nor

receives unilateral transfers. Iceland’s GDP is $9 billion.

i. What happened to Iceland’s net foreign assets during 2015? Did it acquire or lose

foreign assets during the year?

ii. Estimate the official settlements balance. What happened to the foreign reserves of the

central bank of Iceland?

iii. Calculate NFIA.

iv. Show that BOP = 0

v. What is gross national expenditure (GNE), gross national income (GNI), and gross

national disposable income (GNDI) of Iceland?

Answer 1

Iceland's net assets did not increase in 2015 and this means that it was more of a loss than an acquisition. This is because the deficit to be offset with the surplus in the capital amount was of an higher amount.

(1billion +800$) -(750$+100$)= official settlement balance and thus the answer is 1.5 billion. The foreign reserves of the Central bank of Iceland decreased sue to the increased foreign trade deficit.

The NFIA is the net factor income from abroad and it is calculated by subtracting the factor income earned from the residents abroad and the factor income of non resident in domestic territory. Thus 700$-9billion=-8.3billion

The BOP=0

=current account +financial account +capital account +balancing item

=-1billion +100million+750million+150million

=0

GNE=GNI=GNDI because the economy is open as it neither gives or receives unilateral transfers.

It is equal to 700million$+9 billion$(GDP)=9.7billion