Suppose Townsend's exports equal $1,000 billion, its imports equal $950 billion, and
Purchases of foreign assets by its citizens equals $900 billion. What is Townsend's balance on its capital account?

Question

Quizplus · Accepted Answer

Townsend's balance on its capital account is equal to the difference between its purchases of foreign assets by its citizens and purchases of domestic assets by foreigners. Since the information provided only includes purchases of foreign assets by Townsend's citizens, we cannot determine the balance on its capital account directly. However, we can use the identity that a country's current account balance plus its capital account balance should equal zero (assuming no statistical discrepancy). Thus, we can calculate Townsend's current account balance by subtracting its imports from its exports:

Current account balance = exports - imports = $1,000 billion - $950 billion = $50 billion

Since the capital account balance must be equal in magnitude and opposite in sign to the current account balance, we can conclude that Townsend's capital account balance is:

Capital account balance = -$50 billion

However, the options presented are in terms of positive numbers, so we can use the absolute value of the capital account balance, which is $50 billion. Thus, the correct answer is B) $50 billion.

Suppose Townsend's Exports Equal $1,000 Billion, Its Imports Equal $950