Lydora's balance of payments

Lydora has a floating exchange rate. During 2025, rapid growth in household consumption increased expenditure on imported goods. Table 1 shows selected current-account data for 2025. All values are in billions of lydors (L).

Table 1

Selected current-account data for Lydora, 2025.

The capital account recorded a surplus of L2 billion. Financial inflows included foreign direct investment, portfolio investment and government borrowing. The central bank also purchased additional foreign reserve assets. Some economists argue that Lydora should reduce its current account deficit because portfolio investors can withdraw their funds rapidly if confidence falls.

Astoria after the cyclone

Read the extracts and answer the questions that follow.

Text A — Reconstruction and imports

1. A cyclone destroyed roads, farms and factories in Astoria. Imports of food, medicine and construction materials increased sharply, while goods and tourism exports fell. Astoria consequently recorded a current account deficit.

2. Foreign governments provided emergency grants, and one creditor cancelled part of Astoria’s debt. Debt cancellation is recorded as a capital transfer. Reconstruction spending is expected to restore aggregate demand and productive capacity.

Text B — External financing

1. Foreign firms are constructing renewable-energy facilities, while the government is borrowing from international institutions. The central bank sold some foreign reserve assets to obtain funds for international payments.

2. The sale of reserve assets is a financial-account credit item, even though the central bank’s stock of reserves decreases.

Table 1 — Current account transactions, billion astors

Astoria's current account transactions.

Table 2 — Capital and financial account transactions, billion astors

Capital and financial account transactions in Astoria.

Coppera’s mining sector

Read the extracts and answer the questions that follow.

Text A — Mineral exports

1. Coppera exports copper from mines owned mainly by multinational companies. Mineral exports generate substantial revenue, but dividend and profit payments abroad create negative net income from abroad.

2. Mining has attracted capital and technology and increased employment. However, water pollution damages farming communities, and the benefits are unevenly distributed. The government plans to invest tax revenue in education and transport infrastructure.

Text B — Ownership and accounts

1. A foreign company’s construction or purchase of a controlling interest in a Copperan mine is recorded as foreign direct investment (FDI). Purchases of small shareholdings are portfolio investment.

2. Coppera also accumulates foreign reserve assets and lends some funds to neighbouring governments.

Table 1 — Current account transactions, billion coppers

Current account transactions of Coppera.

Table 2 — Capital and financial account transactions, billion coppers

Capital and financial account transactions in Coppera.

Darsana’s infrastructure programme

Read the extracts and answer the questions that follow.

Text A — Imports and development

1. Darsana imports machinery, fuel and medical equipment. Its exports are mainly coffee and clothing. The resulting current account deficit is financed partly through official borrowing from foreign governments and international institutions.

2. Borrowed funds are being used to build an electricity network and rural roads. The projects may increase productive capacity, but repayment will require future interest and principal payments.

Text B — International transfers

1. Overseas workers send money to rural households, while aid agencies provide grants for vaccination programmes. These are recorded as current transfers when they are not linked to ownership of an asset.

2. Foreign firms have also established clothing factories. The government subsidizes worker training to raise productivity and export quality.

Table 1 — Current account transactions, billion dars

Darsana’s current account transactions.

Table 2 — Capital and financial account transactions, billion dars

Capital and financial account transactions for Darsana.

Estavia’s technology boom

Read the extracts and answer the questions that follow.

Text A — Technology trade

1. Estavia exports digital services and electronic components but imports energy and advanced machinery. It also pays royalties and dividends to foreign owners. These transactions are recorded in different components of the current account.

2. Foreign technology companies have built research centres in Estavia. Domestic firms benefit from trained workers and knowledge spillovers, although housing costs have increased in technology centres.

Text B — Mobile financial flows

1. High domestic returns have attracted purchases of Estavian shares and government bonds. Such portfolio investment may be reversed quickly if investor confidence changes.

2. The government is using tax revenue from the technology sector to subsidize university science courses and public transport.

Table 1 — Current account transactions, billion estas

Estavia current account transactions

Table 2 — Capital and financial account transactions, billion estas

Estavia’s capital and financial account transactions.

Fremeria’s reserve transactions

Read the extracts and answer the questions that follow.

Text A — Trade and food processing

1. Fremeria imports fuel and machinery but exports processed food and transport services. The government subsidizes food-processing equipment to increase domestic value added and employment.

2. Drought has reduced agricultural output and raised food prices. The government is considering investment in irrigation and agricultural research.

Text B — Reserve assets

1. Private financial inflows were insufficient to match Fremeria’s current account deficit. The central bank therefore sold some reserve assets, bringing foreign-currency proceeds into the economy.

2. Reserve sales are recorded as a financial-account credit. The overall accounts still have a zero balance because deficits are matched by surpluses elsewhere.

Table 1 — Current account transactions, billion frems

Table 1: Fremeria’s current account transactions.

Table 2 — Capital and financial account transactions, billion frems

Capital and financial account transactions for Fremeria.

Galena’s debt relief

Read the extracts and answer the questions that follow.

Text A — External debt and public services

1. Galena imports medicines, machinery and fuel and exports cocoa and garments. Interest paid to foreign creditors contributes to negative net income. Several creditors recently granted debt forgiveness.

2. The government plans to direct the resulting budget savings toward schools, clinics and agricultural extension services. Critics argue that weak institutions could reduce the effectiveness of this spending.

Text B — Recording debt cancellation

1. Debt forgiveness is recorded in the capital account, which includes capital transfers and transactions in non-produced, non-financial assets.

2. Galena also receives foreign direct investment and official loans. Its central bank sold reserve assets during a period of high import payments.

Table 1 — Current account transactions, billion galens

Table 1 — Current account transactions, billion galens

Table 2 — Capital and financial account transactions, billion galens

Capital and financial account transactions in Galena.

Hesperia’s multinational firms

Read the extracts and answer the questions that follow.

Text A — Investment in both directions

1. Hesperian companies have purchased factories abroad, while foreign companies operate car plants in Hesperia. A resident company’s purchase of a foreign factory is an outward FDI flow and a financial-account debit.

2. Foreign-owned car plants export most of their output. They employ local workers but import many components and transfer profits to parent companies abroad.

Text B — Skills and industrial policy

1. The government subsidizes technical training and transport infrastructure around car plants. Domestic component suppliers may gain from increased demand and knowledge transfers.

2. Economists warn that a financial account deficit does not necessarily imply economic weakness because it may reflect residents acquiring productive foreign assets.

Table 1 — Current account transactions, billion hesps

Hesperia's current account transactions.

Table 2 — Capital and financial account transactions, billion hesps

Hesperia’s capital and financial account transactions.

Indira’s migrant workers

Read the extracts and answer the questions that follow.

Text A — Remittances and households

1. Many Indiran workers live abroad and send funds to their families. These current transfers support spending on food, education and small businesses and partly offset Indira’s deficit in trade in goods.

2. Some households use remittances mainly to buy imported consumer goods. Others invest in irrigation, equipment and education. The impact therefore depends on how the funds are used.

Text B — Aid and investment

1. Foreign aid finances rural clinics, while overseas firms invest in mobile-banking networks. Indira also receives short-term purchases of government bonds.

2. A current account deficit is a negative current account balance in which current-account debits exceed credits.

Table 1 — Current account transactions, billion indars

Table 1: Indira's aggregate current account transactions.

Table 2 — Capital and financial account transactions, billion indars

Capital and financial account transactions for Indira.

Depreciation of the varo

The government of Varosia is concerned about a persistent current account deficit. In January 2025, the floating exchange rate of the varo depreciated by 12%. Export and import contracts meant that traded quantities initially responded slowly.

Table 1 shows estimates of the price elasticities of demand for Varosia's exports and imports following the depreciation.

Table 1

Estimated absolute price elasticities of demand after depreciation

Table 2 shows Varosia's quarterly current account balance before and after the depreciation. Values are in billions of varos (V).

Table 2

Varosia's quarterly current account balance before and after depreciation.

The government is considering subsidies for export-sector training and logistics so that firms can respond more quickly to foreign demand.

External imbalance in Cardonia

Cardonia has experienced strong domestic demand, rising inflation and a persistent current account deficit. Much of the deficit has financed consumer-goods imports rather than capital equipment.

Table 1 shows Cardonia's current account balance and nominal GDP from 2023 to 2025. Values are in billions of cardons (C).

Table 1

Cardonia's current account balance and nominal GDP from 2023 to 2025.

Table 2 shows how the 2025 current account deficit was financed. The capital account balance was zero.

Table 2

Financing of Cardonia's 2025 current account deficit.

At the end of 2024, Cardonia's external debt was C90 billion. During 2025 it borrowed C9 billion from foreign creditors and repaid C2 billion of principal, so net foreign borrowing was C7 billion, as shown in Table 2. The average interest rate payable on the resulting end-of-year external debt was 6%. A credit-rating agency has warned that continued growth of short-term external liabilities could cause a downgrade.

Financial flows and the norin

Norland permits free movement of financial capital and has a floating exchange rate. Its central bank increased its policy interest rate after inflation rose above target. Foreign purchases of Norland's government bonds increased, but economists warned that these portfolio inflows could reverse if investors expected the norin to depreciate.

Table 1 shows Norland's financial-account transactions during 2025. Values are in billions of norins (N).

Norland's selected financial-account transactions in 2025.

Norland recorded a current account deficit of N14 billion and a capital account deficit of N1 billion. During 2025, the exchange rate increased from 0.80 to 0.88 units of foreign currency per norin.

A persistent surplus in Estavia

Estavia is a high-income economy with competitive manufacturing exports and a persistent current account surplus. Household consumption and domestic investment have both declined as shares of GDP. Some Estavian firms have used their savings to purchase assets abroad.

Table 1 shows Estavia's current-account transactions in 2025. Values are in billions of estas (E).

Table 1

Estavia's current-account transactions, 2025

Nominal GDP was E500 billion, and the capital account recorded a surplus of E2 billion.

Table 2 shows selected domestic indicators.

Table 2

Selected domestic indicators in Estavia, 2021 and 2025.

The government is considering increased expenditure on housing, renewable-energy infrastructure and household income support. Exporting firms oppose the proposal because they believe that stronger domestic demand may raise wages and prices.

Jorvik’s mixed external position

Read the extracts and answer the questions that follow.

Text A — Exports, imports and income

1. Jorvik exports pharmaceuticals and engineering services. It imports energy, food and electronic components. Although trade is in surplus, large profit and interest payments abroad contribute to a negative income balance.

2. The government is investing in renewable energy and vocational education. It hopes to reduce dependence on imported energy and increase the quality of exports.

Text B — Assets and liabilities

1. Foreign firms continue to acquire Jorvik businesses, while Jorvik’s pension funds purchase foreign shares and bonds. The central bank is also accumulating reserve assets.

2. The financial account records these cross-border changes in ownership of financial assets and liabilities. Its balance must be considered together with the current and capital accounts.

Table 1 — Current account transactions, billion jors

Jorvik current account transactions.

Table 2 — Capital and financial account transactions, billion jors

Capital and financial account transactions for Jorvik.

Correcting Belpa's current account deficit

Belpa has a persistent current account deficit of B36 billion. Its currency is managed by the central bank but is considered overvalued. The government is considering a tariff on imported consumer goods, a 10% devaluation of the bel and long-term supply-side policies.

Imported consumer goods initially cost B80 billion per year. Their price elasticity of demand is estimated to be minus 0.50. The proposed tariff would raise their domestic price by 20%, while leaving the foreign-currency price unchanged.

Table 1 shows the absolute price elasticities and directions of the estimated quantity responses to a 10% devaluation after contracts have adjusted.

Table 1

Absolute price elasticities and quantity-response directions after a 10% devaluation of the bel

Table 2 shows selected structural indicators for Belpa and a group of competing exporting economies.

Table 2

Structural indicators for Belpa and competing exporting economies.

Several major trading partners have warned that they may retaliate if Belpa introduces the tariff.