The Balance of Payments shows the flow of money in and out of our country. The money moves in the opposite direction from the goods and services, so when we import goods we have a negative money flow, and when we export goods we have a positive money flow.

Question 1: Look at the Current Account on our BoP for 2011. Using only the bold numbers which represent totals (lines 1, 18, and 35), calculatethe balance on Current Account for 2011.

Question 2: Does the BoPfor 2011 indicate a trade deficit or a trade surplus?

Question 3: Will thecurrect accounts balance in 2011 put downward (depreciating) or upward (appreciating) pressure on our currency exchange rate?

Question 4: Look at the Capital Accounts (also called Financial Accounts) in line 40 and 55. Although foreign owned assets in the US exceed US owned assets abroad, the trend from 2010 to 2011 is for our loss of foreign holdings to decrease while the increase in US holdings abroad is slowing down. In other words, there has been a shift of asset ownership back toward the US. Will this put downward (depreciating) or upward (appreciating) pressure on our currency exchange rate?

Question 5: Look at US official reserve assets in line 41. This is the balancing account of the BoP. Are our reserve asset increasing or decreasing from 2010 to 2011? And will this put downward (depreciating) or upward (appreciation) pressure on our currency?

Question 6 a:Can you think of reasons why a country might wish to have a slightly overvalued currency? As an example, Great Britain and the United States have overvalued currencies relative to the European Monetary Union and their other trading partners because both these currencies have been held as international reserve currencies by other countries. Why would that relationship cause the UK and the US to prefer an overvalued currency to an undervalued currency?

Question 6 b: Can you think of reasons why a country might wish to have a slightly undervalued currency? As an example, China's currency is undervalued relative to her trading partners. What is the advantage to China? The currency valuation strategies of China and the US are in fact complementary: China uses export earnings to buy US Treasury Bills. Can you explain in one or two sentences what long-run effects we might see in both economies as a result of this strategy?