The effect of investment composition
The effect of investment composition: Two (almost) identical countries – Carolandia and Josephburg – both run a balanced (0) current account from 1970 to 2000. Over this period Carolandia owns equities in Josephburg equal to 100% of Carolandia’s GNP (which also by coincidence is identical to Josephburg’s GNP over the same period). Similarly, Josephburg owns the Carolandia Government’s treasury bills – equal to 100% of its GNP. Assume there are no revaluations.
a) What is the net international investment position for each country over the period?
The return on Carolandia’s treasury bills is 2% per year over the period. The return on Josephburg’s equities is 5% per year (since revaluations are 0 these are all dividends).
- b) What are the average gross factor payments (as a percentage of GNP) in any given year for both countries? What are the net factor payments for each country?
- c) Assume no growth in GNP for either country over the thirty year period. What are the cumulated net factor payments (as a percent of GNP) over the period for both the countries? (compounding is not necessary)
- d) What is the cumulated trade balance over the thirty year period for each country? Are they the same? Is so why? If not, why not?
- e) In reality revaluations to equities are common (normally they are capital gains but can sometimes be losses). How would the NIIP of Carolandia be different if the return on equities was 2% revaluations and 3% dividends?
Answer preview for the effect of investment composition
Access the full answer containing 471 words by clicking the below purchase button