Answers to quantitative exercises

Transcription

1 Answers to quantitative exerises Chapter Prie in $ (P) Quantity emane (Q ) Q = P Prie in $ (P) Quantity emane (Q ) Q = P Prie in $ (P) Quantity emane (Q )

2 Prie in $ (P) Quantity supplie (Q ) Q = + P Prie in $ (P) Quantity supplie (Q ) Q = + P Prie in $ (P) Quantity supplie (Q ) Chapter a + P = P P = P P = P = Q = () = + P = P P = P P = P = Q = () = + P = P P = P P = P = Q = () =

3 answers to quantitative exerises a Prie in $ (P) Quantity emane (Q ) Q = P Quantity supplie (Q ) Q = + P a Q = + P; Q = P Prie in $ (P) Quantity emane (Q ) Q = P Quantity supplie (Q ) Q = + P The equilirium quantity ought an sol is given y the intersetion point on the graph aove. Q = + P; Q = P + P = P ( ) + P = ( ) P P = P P(+P) = P(+P) P = P/ = / P = Q = exess eman Q = + (); Q = () Q = ; Q = = units exess eman

4 Chapter The PE = asolute value of % hange in quantity over % hange in prie. Quantity falls y % following an inrease in prie of %: PE = / =. First, alulate % hange in prie: ( )/ =. = %. Now plug this into the PE formula with the PE =.:. = % Q/. implify y multiplying. =.. The % hange in quantity resulting from a % inrease in prie is.%. Therefore, the new quantity is (. ) =. The inrease in prie from $ to $ leas to a erease in the quantity emane from to units. PE is always negative eause the law of eman says that there is an inverse relationship etween quantity emane an prie. When prie inreases, quantity falls, an vie versa. To simplify, PE is usually expresse as an asolute value, an the PE oeffiient is therefore positive. a Q = () = Q = () = % hange in Q = ( )/ =. = % % hange in P = ( )/ =. = % PE = / =. Q = () = Q = () = % hange in Q = ( )/ =. =.% % hange in P = ( )/ =. = % PE =./ =. The PE inreases as the prie of the goo inreases. When the goo gets more expensive, it makes up a larger proportion of onsumers inome an it eomes more exlusive in the eyes of onsumers (more of a luxury). Both the proportion of inome the prie of a goo represents an its status as a luxury are eterminants of PE. A PE of iniates unit elastiity. If the prie falls an eman is unit elasti, then the perentage inrease in quantity equals % an there will e no hange in the revenues of sellers. XE = % hange in the quantity of one goo over % hange in the prie of a relate goo. Therefore, XE = / =.. ine the XE is negative, the goos must e omplements. An example of omplementary goos is haroal an haroal areues. If haroal pries rise, we woul expet areue sales to fall. ( )/ =./. =.. ( )/ The two goos must e omplementary goos, eause the XE oeffiient is negative. An example is footalls an footall shoes. The two goos in this example are ross-prie elasti, sine the asolute value of the XE oeffiient is greater than one. % Q. = ( )/ = % Q/. To fin the % hange in tennis rakets, simplify the equation:.. =.. o a % inrease in the prie of tennis alls le to a erease in eman for tennis rakets of %. ( )/ XE = =./. =. ( )/ YE = % hange in quantity emane for a goo resulting from a partiular % hange in onsumers inome. YE = / =.. ine YE is positive, this goo must e a normal goo, suh as restaurant meals. a % hange in Q = ( )/ =. = % % hange in Y = ( )/ =. =.% YE = /. =. ine YE is negative, this must e an inferior goo. An example of suh a goo is isount toothpaste. a YE for gourmet ie ream is inome inelasti eause the oeffiient is less than. ine YE is positive, ie ream is a normal goo. YE for fast foo hamurgers is inome elasti eause the asolute value of the oeffiient is greater than. ine YE is negative, fast foo hamurgers are an inferior goo. YE for air travel is inome elasti eause the oeffiient is greater than. It is also a normal goo, sine YE is positive. PE = % hange in quantity ivie y % hange in the prie of a goo. PE = / =.. PE =. % hange in P = ( )/ =. To fin the hange in the quantity supplie, we plug the % hange in prie into the PE formula:. = % Q/. =. (.) =. =.% The % hange in quantity supplie resulting from a fall in prie of % is.%. a Q = +.() = Q = +.() =. % hange in Q = (. )/ =. =.% % hange in P = ( )/ =. = % PE =./ =.

5 answers to quantitative exerises Q = +.() =. Q = +.() = % hange in Q = (.)/. =. =.% % hange in P = ( )/ =. = % PE =./ =. Over time, prouers are etter ale to respon to a hange in the prie of the goos eing proue. If eman falls an prie falls, prouers an shut own plants or lose fatories over time, reuing their output y more than they an in the short run. If eman an prie rise, prouers an open new plants or fatories an inrease output y more over time. Chapter + P = P (+) + P = (+) P P = P P(+P) = P(+P) P = P/ = / P = Q = Q = + P; Q = P Prie in $ (P) Quantity emane (Q ) Q = P Quantity supplie (Q ) Q = + P The market equilirium prie an quantity are given y the intersetion point on the graph in answer. $ tax TAX P =., Q =, as shown in the graph elow. P TAX =.. f a g h e i $ tax TAX onsumer surplus efore tax: a + + onsumer surplus after tax: a prouer surplus efore tax: + e + f + g prouer surplus after tax: f area of the tax: + eaweight loss: + e onsumer tax:. =. per unit ( units) = $. prouer tax:.. =. per unit ( units) = $. total tax:. units = $ a efore tax: = $ after tax:. = $.

6 a efore tax: = $ after tax. = $. a more elasti eman = lesser onsumer tax uren less elasti eman = greater onsumer tax uren The value of in a linear funtion shoul inrease to make eman more elasti (the rate of hange in Q inreases). The value of in a linear funtion shoul erease to make eman less elasti (the rate of hange in Q ereases). + P = P P = P P = P = Q = Q = + P; Q = P Prie in $ (P) Quantity emane (Q ) Q = P Quantity supplie (Q ) Q = + P The market equilirium prie an quantity are given y the intersetion point on the graph aove. $ susiy UB P =., Q =, as shown in graph elow.. P UB =. a e i j f k h g $ susiy onsumer surplus efore: a + onsumer surplus after: a + + e + f + g prouer surplus efore: e + i prouer surplus after: e + f + g + h + i + j area of the susiy: e + f + g + h unit = $ efore susiy = $ after susiy = $. efore susiy = $ after susiy = $. eman woul hange at a faster rate, eome less steeply slope. eman woul eome muh more elasti. UB

7 answers to quantitative exerises A given per-unit susiy woul inrease the quantity more signifiantly with more elasti eman. The new quantity woul e greater, an the amount of the susiy woul e larger. Chapter When Q L =, TP =. Without any workers, the firm annot reate any output. a TP inreases at an inreasing rate. TP no longer inreases with the seventh worker, an atually ereases with the eighth worker. By the time the firm employs six or more workers, there is no more apital for them to use an the aitional output attriutale to those workers stops inreasing; it eomes negative, iniating that the eighth worker mae the other seven workers less proutive overall. Marginal prout measures the hange in the total prout as aitional workers are hire. Marginal prout egins to eline after the thir worker. ine lan an apital are fixe, aitional workers are less proutive than those efore them after the firm employs three workers. The elining proutivity of laour when it is ae to a fixe amount of apital an lan is known as the law of iminishing marginal returns. In orer to inrease output in the short run, a firm must hire more workers. Laour is a variale resoure, so as more workers are hire, total variale ost inreases. Fixe osts are the osts of resoures that o not vary with output in the short run. Examples inlue insurane, rent, interest on loans, et. As output inreases in the short run, fixe resoures remain fixe, therefore the osts of these resoures also remain fixe. Total ost = total fixe osts + total variale osts at every level of output. A firm only faes two types of osts, those for its fixe resoures an those for its variale resoures. Ae together, these equal the firm s total osts. Average total ost tells us the per-unit ost of rootrons. The marginal ost measures the hange in total ost whenever output inreases y one unit. The numer of workers neee to proue one aitional rootron ereases at first, iniating that workers atually eome more an more proutive when the firm starts aing laour to its fixe apital. But eyon three units of output, the numer of workers neee to proue aitional units gets larger an larger, iniating that laour eomes less an less proutive as the firm ontinues to hire workers to work with its fixe apital. The law of iminishing returns oserves that as laour is ae to a fixe amount of lan an apital, eyon a ertain point, the proutivity of the variale resoure elines. Total output per hour (Q) Numer of workers (Q L ) Total fixe ost (TFC) Total variale ost (TVC) Total ost (TC = TFC + TVC) Average fixe ost (AFC = TFC Q) Average variale ost (AVC = TVC Q) Average total ost (ATC = TC Q) Marginal ost (MC = TC Q)

8 A firm s total revenue is maximize when the last unit it proue yiele zero marginal revenue. Therefore, at five units of output, this firm is maximizing its total revenue. At six units an eyon, marginal revenue eomes negative, iniating that the firm s total revenue is falling. The revenue the firm earns when it sells just one unit of output is the prie it sells that output for. Beyon one unit, however, the firm must aept a lower prie to sell aitional units (assuming it is a single-prie seller). Therefore, at every level of output eyon one unit, the marginal revenue is less than the prie of the output, sine the firm has to aept less revenue when it lowers the prie of all of its output as output inreases. Costs woul ontinue to inrease. If total revenue ereases an total ost inreases, the firm s profits woul efinitely fall. ine most firms are intereste in maximizing profits, prouing eyon five units woul harm this firm. a ix units. This is where MC is as lose as possile to MR, ut not greater than MR. At any level of output eyon six units, this firm woul reue its total profits, sine the ost of aitional units exees the revenue earne. $. The firm s total revenue at six units is $ an its total ost is $. Eonomi profit = TR TC = =. At less than three units, this firm s total ost is greater than its total revenues, iniating it woul earn losses when prouing less than three units. Beyon seven units, this firm s total osts exee its total revenue, iniating the firm woul earn losses eyon seven units. The perfetly ompetitive firm is a prie-taker. ine it is one of hunres or thousans of iential firms, a hange in one firm s output has no impat on the market equilirium prie. Therefore, as this firm s output inreases, the prie remains onstant at $. This firm an sell aitional units of output at the onstant equilirium prie of $, so its marginal revenue (the hange in total revenue from eah aitional unit of output) is always $. a Four units. Beyon four units, the firm s marginal ost is greater than its marginal revenue, iniating that its total profits woul erease eyon this point. $. The firm s total revenue at four units is $ ut its total ost is only $. TR TC = =. Five units. The firm s marginal revenue is zero at five units. At any level of output elow five units, the firm an inrease its total revenue y inreasing its output, ut eyon five units MR eomes negative an total revenue egins to eline. If the firm proue any more than seven units of output, its total osts woul exee its total revenues, iniating the firm woul earn eonomi losses. This firm proues less output an harges a higher prie than the perfetly ompetitive firm with the same osts. The imperfet ompetitor must lower its prie to sell more output, sine it is a prie-maker an has signifiant market power. The firm must sell all its output for the same prie (it annot prie-isriminate). Therefore, when it lowers its prie to sell aitional units, it oes so not just for those aitional units, ut for all of its output, whih means the firm s marginal revenue will always e lower than the prie of the prout. Chapter Beause this is where the firm s MR = MC, the profitmaximizing quantity. Total revenue = prie quantity. The firm is prouing units at a prie of $ per unit. Therefore, TR = = $ Total ost is foun y multiplying average total ost (ATC) y level of output. At units, the firm s ATC = $. Therefore, TC = = $ Eonomi profits = total revenues total osts. Therefore, eonomi profits = = $ Firms are profit-seekers. ine there are no arriers to entry, an sine firms in this market are earning eonomi profits, we woul expet more firms to enter this market in the long run. TR = P Q. Therefore, TR = = $ TC = ATC Q. Therefore, TC = = $ Losses are another wor for negative profits. This firm s profits are $ $ = $. This firm is losing $ at the moment. Either eman for the prout oul have fallen therey reuing the prie, or the firm s osts oul have risen therey inreasing ATC an eliminating the firm s profits. Firms are losing money y remaining in this market, therefore, some will wish to leave in the long run. The firm s total revenue = prie quantity; TR = =. Its total osts = average total ost quantity; TC = =. The firm s total osts exee its total revenues, iniating that this firm is earning losses of $. a No. The firm is urrently earning eonomi losses of $, yet it is not prouing at its profit-maximizing level of output where MC = MR. Even though we are

9 answers to quantitative exerises not given the firm s MR, we know it is $ eause it is a perfet ompetitor, so MR = P. No. The firm is alreay prouing elow its profitmaximizing level. ine MC is less than P, we know this firm is prouing too little output alreay. No. The firm s urrent losses of $ are less than its total fixe ost. We an alulate total fixe osts y etermining AFC (ATC AVC) an multiplying it y the quantity proue. AFC = =. Total fixe ost is therefore = $. If the firm shut own, it woul lose these fixe osts, whih exee its urrent losses of only $. Alternatively, we oul use the simple shut-own rule, whih says that if P is less than AVC, the firm shoul shut own. Clearly, the prie of $ is greater than the firm s AVC of $, so the firm shoul not shut own. Yes. By inreasing its output, the firm will move upwars along its MC urve until MC = P. At that point, we an assume the firm s losses will e smaller, an it may even reak even or earn profits. No. If the firm s ATC =, the firm is still earning losses of $ per unit (sine the prie is only $). With losses eing earne, firms will exit the market in the long run until the firms that remain are only reaking even. Prie (P) Chapter Quantity emane (Q ) Total revenue (TR) Marginal revenue (MR) a MC osts an revenues / $ (P) P PROFMAX P REVMAX MR Chapter Q PROFMAX Q REVMAX MR = = AR a C + I + G + (X M) = GP Government spening on goos an servies (G) Gross private omesti investment (I) Consumption (C) Exports (X) Imports ( M) GP GP net inome reeipts from aroa = GNI GP Inome from foreign employment Net property inome from aroa GNI $ illion =. illion $. trillion =. trillion. $ million =. illion GP growth year : =. year : =. year : =. year : =.

10 Inflation rate year : =. year : =. year : =. Chapter a MPC = C/ Y = / =. MPT = T/ Y = / =. MP = / Y = / =. MPM = M/ Y = / =. (Notie that the hange in onsumption is only $ illion, sine of the $ illion inrease in househol spening, $ illion went towars the purhase of imports.) MRL = MPT + MP + MPM = =. Government spening multiplier, k = /( MPC) = /(.) =. An inrease in investment spening of $ illion will e multiplie. times through suessive inreases in onsumption an investment spening, ultimately inreasing Germany s total output y $ illion. Chapter a Country X s laour fore is million people (% of the million aults). The other million an e assume to e stuents, not willing or ale to work, prisoners, or other aults who are not part of the laour fore. Unemployment rate (UR) = % of laour fore who are unemploye. Assuming million of the million in the laour fore are employe, the unemploye population is million people. UR = (/) =. =.% a LFPR = (/) =. =.% UR = numer of people unemploye / numer of people in the laour fore. Therefore, with UR = %, numer of people unemploye = % of laour fore. m. =.m. There are. million people unemploye. a witzerlan s LFPR =. / =. =.% witzerlan s UR = /. =. =.% pain s LFPR =. / =. =.% pain s UR = /. =. =.% Chapter a outh Korea Germany, China an Japan Q, Q, Q, Q. In Q Germany experiene eflation, an in Q returne to inflation. In the fae of inflation, househols prefer to spen rather than save. Inflation reues the real interest on savings, an means pries will e higher in the future than toay, so househols wish to spen their money efore it loses its value. a Q Q : (..)/. =. =.% Q Q : (..)/. =. =.% Q Q : (..)/. =. =.% Q Q : (..)/. =. =.% Q Q : (..)/. =. =.% Q Q : (..)/. =. =.% Inflation was highest etween Q an Q, the average prie level rose at its highest rate of.%. The lowest rate of inflation ourre etween Q an Q, when the rate of inflation was.%. From Q until Q, the ountry experiene isinflation meaning that the inflation rate was still positive, ut lower eah quarter than the quarter efore. The ountry experiene eflation etween Q an Q, uring whih inflation was negative. a Ielan; the inflation rate was.% Only Belgium experiene eflation, when the prie inex fell from. to. etween an. The eflation rate was therefore.%. inflation rate : (..)/. =. =.% inflation rate : (..)/. =. =.%

11 answers to quantitative exerises Inflation rate was higher etween an than etween an. a weighte prie of the asket of goos for : (.) + (..) + (.) + (.) + (.) =. prie inex for = (./.) = = weighte prie of the asket of goos for : (..) + (.) + (.) + (..) + (.) =. prie inex for =./. =. = inflation from to = ( )/ =. = % e Books are weighte at just % of the typial househol s onsumption. o a % inrease in the prie of ooks must e multiplie y. to etermine its effet on the overall prie level: %. =.%. A % inrease in the prie of ooks, eteris parius, will inrease the average prie level y just.%. A % inrease in the prie of rent woul have a greater impat on the average prie level, eause rent is weighte at % of the typial househol s onsumption: %. = %. A % inrease in rents woul inrease the average prie level y %. The impat that a hange in the prie of a partiular ategory of goos has on the overall inflation rate epens how heavily that ategory is weighte in the prie inex. Goos like rent an petrol are weighte more heavily than goos like Vs an hamurgers, so when rent an petrol eome more expensive, it inreases the overall inflation rate more than when Vs an hamurgers go up in prie. Chapter None of the ountries experiene reession etween an. ome of them experiene slowing growth, ut for all the ountries represente, growth was positive throughout an. Output inrease etween an, ut at a muh slower rate in than it i in. In, GP growth was aroun %, while in it fell to aroun.%. Ghana oul have experiene an inrease in the proutivity of its workfore, or there oul have een a oost in export sales or government spening, or investment in apital y firms, or onsumption spening y househols. Generally speaking, ountries in whih investment makes up a larger perentage of GP ten to have higher average growth rates. Ghana an the Czeh Repuli experiene the highest levels of investment, an on average the highest growth rates. Japan ha the lowest levels of investment, an one of the lowest growth rates. The U experiene reession in the early s, then again in the mi-s. After, reession eame miler, ut there were notale perios of negative growth in the early s, early s an again in. The highest rates of growth appear to follow the years in whih growth is negative or very low. This an e explaine y the usiness yle theory. When an eonomy ontrats, or experienes negative growth, it may experiene rapi growth uring the reovery phase while it raes to get ak to where it was efore the reession starte. High growth rates are unsustainale over time, however, eause one an eonomy returns to full employment, resoures eome inreasingly sare an growth egins to slow again. ine the s, flutuations in growth rates have eome more mil, with lower peaks an miler troughs. This is eviene that maroeonomi poliies have een effetive at promoting relative staility in the growth of output in the U. a ( )/ =. =.% ( )/ =. =.% ( )/ =. =.% ( )/ =. =.% Between an growth was %, its highest rate over the years iniate. : (..)/. =. =.% : (..)/. =. =.% : (..)/. =. =.% : (..)/. =. =.% real GP growth rate = nominal growth rate inflation rate :.%.% =.% :.%.% =.% :.%.% =.% :.%.% =.% e Between an, when the real GP grew y.%. Chapter a The worker will pay no tax on the first euros: = euros He or she will pay.% on the next euros:. = euros in tax The worker earning euros will pay an average tax rate of / =. =.%. The marginal rate of taxation of.% is greater than the worker s average tax rate of.%, eause the marginal rate only applies to inome earne aove an eyon the money

12 he or she earne that was inlue in the lower tax rakets. He or she will pay: = plus ( ). = plus ( ). = plus ( ). =. total tax pai = + + = euros / =. =.% a (.) + (.) = $ (.) + (.) + (.) = $ (.) + (.) + (.) + (.) = $ a / =. = % / =. =.% / =. =.% a. = $ in tax. = $ in tax The iret tax on inome is more effetive at reistriuting inome, eause it inreases as a perentage of inome as inome inreases; it is progressive. The iniret tax, on the other han, is regressive. The rih pay more than the poor, ut the perentage of the rih person s inome pai in tax is muh lower than the poor person s. In the aove example, the rih person earning $ pays $ in tax, or just %. With the same % iniret tax though, the poor person earning $ pays $ in tax, or % of his or her inome. Chapter a The U government never ran a uget surplus etween an. The national et grew every year of the eae, iniating that the government ran a efiit in eah year. In, the national et grew y nearly $. trillion, iniating that the uget efiit was aroun $. trillion in. uring eah of the years shown, the U government spent more than it ollete in tax revenues. It is possile that the government passe tax uts uring this perio, or that it simply inrease its level of spening more rapily than it inrease its tax reeipts. a Between an unemployment almost oule from.% to.%, iniating the U was in a eep reession. Between an, unemployment inrease y aroun %, iniating that the eonomy was in a reession, ut not one as eep as the one in the late s. To aress rising unemployment, the U government oul have ut taxes or inrease government spening. oing so woul inrease househols isposale inomes an inrease the level of aggregate eman, moving the eonomy ak towars full employment (see figure elow). P P P Y LRA RA A A after efore Y FE rgp Using ontrationary fisal poliy to reue inflation may lea to an inrease in unemployment. Using expansionary fisal poliy to reue unemployment may ause inflation. a pening multiplier, k = /( MPC) k = /(.) = /. =. The esire hange in national inome of $ illion woul require an inrease in government spening of /. = $ illion A tax ut of $ illion woul not have the same expansionary effet as an inrease in government spening of $ illion, eause some of the tax ut (%) will e leake from the irular flow efore it is ever spent in the nation s eonomy. An inrease in government spening, on the other han, is a iret injetion into the nation s irular flow. If the government wishes to reue A y $ illion to reue inflation, it woul only have to ut government spening y /. = $ illion. a soyeans / tons Chapter Country M Country U avoaos / tons

13 answers to quantitative exerises Country M: opportunity ost of soyeans = avoaos/ soyeans =. avoaos opportunity ost of avoaos = avoaos/ soyeans = soyeans Country U: opportunity ost of soyeans = avoaos/ soyeans =. avoaos opportunity ost of avoaos = soyeans/ avoaos = soyeans Country M has omparative avantage in soyeans, with a lower omesti opportunity ost (. avoaos) than ountry U (. avoaos). Country U has omparative avantage in avoaos, with a lower omesti opportunity ost ( soyeans) than Country M ( soyeans). e Country M woul normally give up soyeans for every avoao. Country U woul normally give up. avoaos for eah soyean. One rate that woul enefit eah woul e for Country M to trae. soyeans for avoao from Country U. From Country M s perspetive, it woul trae. avoaos for every soyean, an improvement over the previous omesti opportunity ost of.. This woul make oth etter off, eause the eah ountry has a lower opportunity ost for traing than they i when trying to make oth prouts themselves. Chapter P WORL = units (Q) OMETIC WORL OMETIC Answers may vary, ut shoul approximate the following. a P WORL = OMETIC WORL + TARIFF WORL OMETIC soyeans / tons Country U i = $ ii = $ iii = $ units (Q) Country M iv = $ v = $ avoaos / tons vi ½ ( ) = ½() =. ½( ) = ½() =. The total area of ineffiieny an welfare loss =. +. =

14 a Results may vary, ut shoul approximate the following. quota prie. P WORL = i = $ units (Q) OMETIC OMETIC ii omesti quantity prie after quota =. = $. iii = $ iv. = $. QUOTA WORL v. = $. = $. $ + $. = $. a Results may vary, ut shoul approximate the following. susiy P WORL = i = $ ii = $ iii = $ iv = $ v ½( ) = $ vi = $ units (Q) OMETIC OMETIC UBIY WORL Chapter a Q = + P; Q = P + P = P P = P P = P = RMB per U Q = RMB per U (P) quantity of U (Q) a U/. GBP =. GBP uys U /. = GBP. = U GBP/ GBP =. GBP (the prie has risen %) The ol exhange rate =. GBP per U. Now it shoul take % more GBP to uy U (or anything prie in U). o the new exhange rate =.. =. GBP per U Last year, a RMB jersey ost JPY, therefore, eah RMB ost / JPY. The exhange rate of the RMB was JPY. One JPY was therefore / RMB or. RMB. This year, the same RMB jersey osts JPY. More JPY are neee to uy the jersey, iniating that the JPY has epreiate. The new JPY/RMB exhange rate is /, or JPY per RMB. One JPY is now therefore / RMB or. RMB. Chapter a i urrent aount alane = export of goos: + export of servies: imports of goos: imports of servies: + inome alane: + urrent transfers: $ illion

15 answers to quantitative exerises This ountry has a urrent aount efiit of $ illion. ii finanial aount alane = iret investment: + portfolio investment: This ountry has a finanial aount efiit of $ illion. iii apital aount alane = $ illion apital transfers: + transations in non-proue, non-finanial assets: This ountry has a apital aount surplus of $ illion. $ illion iv urrent aount + finanial aount + apital ount + hange in reserve assets =, therefore: reserve assets = reserve assets = + = Change in reserve assets is $ illion. v alane of payments = urrent aount + finanial aount + apital aount + hange in reserve assets BoP = = The ountry has a trae efiit. It purhase more goos an servies from the rest of the worl than the rest of the worl ought of its goos an servies. The ountry s reserve assets must have hange y $ illion. This numer is positive eause the ountry overall ha a net efiit in its urrent, apital an finanial aounts of $ illion, meaning that more money left the ountry for all its international transations than ame into the ountry. For this reason, the ountry s entral ank ha to sell off $ illion of its holings of foreign exhange, whih it exhange for its own urreny, resulting in an inflow of $ illion of its own urreny from the rest of the worl. This makes up for the net outflow of $ illion in the three aounts, an allows the ountry to alane out its alane of payments at zero. Chapter A. terms of trae value for year means that the average prie of imports is greater than the average prie of exports. The terms of trae have eteriorate. A. terms of trae value for year means the average prie of exports is greater than the average prie of imports. The terms of trae have improve. Year Year Year Year Year Year Year inex of average export pries Tale. CalCulaTing TeRM of TRae inex of average import pries Calulation of terms of trae Terms of trae improvement or eterioration? inex year. eterioration. improvement. eterioration improvement eterioration