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Exam 3: China and the United States and the Balance of Payments

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Question 1

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Go to FRED (the Federal Reserve Economic Database) and update China's current account balances and foreign exchange reserve holdings both graphically and numerically. Determine the implied value of China's financial account + capital account + errors for the most recent three years.

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11eda46c_e418_b0f5_8146_230608c02889_TBR1598_00

Question 2

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Explain why as a conventional accounting measure, the balance of payments is equivalent to "the statement of cash flows" while for financial valuation purposes the current account is almost the same as "cash flow."

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Since the balance of payments includes A...

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Question 3

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Determine the cash flow of the United States and China based on Table 3.3. Then update the data using FRED. Taking a quick approach we can just use current account balances and balance of payments measures for financial and accounting cash flows. Source for United States: HYPERLINK "http://www.bea.gov/newsreleases/glance.htm" http://www.bea.gov/newsreleases/glance.htm $\begin{array}{|l|l|l|l|l|}\hline \text { USD Billions } & \text { Table 3.3 } & \text { Table 3.3 } & \text { China } & \text { United States } \\& \text { China } & \text { United States } & 2012 & \\\hline \text { Financial Cash } & 305.3 & 470.9 & 193.1 & -410.6 \\\text { Flow or Current } & & & & \\ \text { Account } \\\hline \text { Account Cash} & & -347.9 & 128.3 & -410.6^{*} \\\text { Flow or Balance of } & & & & \\\text { Payments } & & & &\\\hline\end{array}$

Discuss: a. The balance of payments is a measure of a country's accounting cash flow while the current account is a measure of a country's financial cash flow. b. In recent years, the United States has had a negative financial cash flow while China has had both a positive financial and accounting cash flow. The opposing balances are related. c. We should not worry about cash flows for either China or the United States since a country is not a company and having too much or too little cash flow is not important.

Consider the current account balances for China and the United States: a. Explain the four different ways of looking at a current account deficit. b. Discuss: If China stopped buying U.S. Treasury bills, the U.S. current account deficit would shrink. Which of the four views of a current account deficit is useful in this context?

Choose among the four different ways of looking at a current account deficit or surplus and explain why China has run a historically large current account surplus and the United States has historically run a current account deficit.

Explain why the chapter argues that China's foreign exchange capital structure has been "conservative" in recent decades. Relate this to questions of capital mobility and financial crises. Discuss this in class in the context of the following notes: