Please explain your answer as I\'m a beginner. Thank you very much! The U.S. int
ID: 2759111 • Letter: P
Question
Please explain your answer as I'm a beginner. Thank you very much!
The U.S. international investment position (external wealth) worsened from -5,327 billion at the end of 2013 to -7,020 billion at the end of 2014. The current account deficit in 2014 was 389 billion, and balance on the capital account was zero. What were the net capital gains on U.S. external wealth during 2014? Suppose that the U.S. runs current account deficit of the same magnitude as in 2014 every year for the next 5 years. Assuming that net capital gains are zero, what will the net international investment position at the end of 2019 be?Explanation / Answer
This can be explained by the formula
IIP (New) – IIP (Old) = Current Account Balance + Net Valuation Change
Substituting values we get
-7020 – (-5327) = -389 + Net Valuation Change
Hence Net valuation change = 389 + 5327 – 7020 = -1304
If for the next 5 years net valuation change is zero then as per above formula
IIP (New) = IIP (Old) + Current Account Balance x 5
IIP (New) = -7020 + (-389) x 5 = -8965