KING'S COLLEGE LONDON

(University of London)

King’s Business School

6QQMN969: INTERNATIONAL FINANCE

2023-24

Tutorial 2

1. Show how each of the following would affect the US balance of payments. Include a
description of the debit and credit items and indicate which specific account is affected
(e.g. imports of goods and services (IM), exports of assets (EXA), etc.):
a. A computer manufacturer in California buys a $50 hard disk from a Malaysian
company and pays with funds in a bank account in Malaysia.
b. A US tourist in Japan sells his iPod to a local resident for yen worth $100.
c. The Federal Reserve sells $500 million of its holdings of US Treasury bonds to
a British financial firm and purchases pound sterling foreign reserves.
d. A foreign owner of Apple shares receives a dividend payment of $10,000, which
is paid into a New York bank.
e. The central bank of China purchases $1 million of export earnings from a firms
who sold toys to the US, and holds the $1 million dollars as reserves.
f. The US government forgives a $50 million debt owned by a developing country.

2. Consider the economy of Opulenza. In Opulenza, domestic investment of $400 million

earned $15 million in capital gains during 2009. Opulenzans purchased $160 million in
new foreign assets during the year; foreigners purchased $120 million in Opulenzan
assets. Assume the valuation effects total $5 million in capital gains.
N.B. We need to assume a value for the capital account. We will assume KA = 0 in the
following transactions.
a. Compute the change in domestic wealth in Opulenza.
b. Compute the change in external wealth for Opulenza.
c. Compute the total change in wealth for Opulenza.
d. Compute domestic savings for Opulenza.
e. Compute Opulenza’s current account. Is the CA in deficit or surplus?
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f. Explain the intuition for the CA deficit/surplus in terms of savings in Opulenza,
financial flows, and its domestic/external wealth position.
g. How would a depreciation in Opulenza’s currency affect its domestic, external,
and total wealth? Assume that foreign assets owned by Opulenzans are
denominated in foreign currency.

3. Use the Metzler diagram to study the effect of the following events on the US current
account and the world interest rate:
a. Ageing population in China leads to an increase in saving for retirement by
Chinese households
b. The US government implements a series of tax cuts
Which of these events is more consistent with the evolution of the world interest rate
since the late 1990s? Explain.