# Foreign Account

Foreign account shows the transactions of the nation with the other parts of the globe. This account covers international movements of goods and services and transfer of payments and corresponds to the current account of the international balance of payments. The structure of the foreign account is shown below.

 Payments Value in Million \$ Receipts Value in Million \$ Exports of goods and services xx Imports of goods and services x Transfer payments to foreigners by persons x Transfer payments to foreigners by government x Net foreign investment x Net receipts from foreigners xx Net payment to foreigners xx

Explanation of this tablet

1. Foreign account exports have been shown under payments i.e. on the left side and imports under the receipts on the right side. This is for the reason that the amount received by the nationals of the nations for exports is paid to foreign countries in exchange for imports and transfer payments.
1. Here payments and receipts relate to the other parts of the globe and not to the nation itself.
1. The five account system detailed above relates to flows of the economy in terms of production, consumption, government transactions, capital accumulation and transactions with the other parts of the globe.
1. The accounts based on them are known as functional accounts as they are based on a classification of transactions according to their functions.

Determination of National Income

In a simple model of income and also exports and imports, the national income is the sum of consumption expenditure (C) and Investment expenditure (I) and it is given by:

Y         =          C + I,

Where, Y stands for the level of national income.

Let us see few illustrations which help in calculating the national income.

Illustration 4

Presume in an economy, autonomous investment I = \$ 1,200 million and the following consumption function is given to be C = 400 + 0.8Y. You are required to determine the equilibrium level of income.

Solution

Y         =          C + I                            ……..Equation (1)

C         =          400 + 0.8Y

I           =          1200

Now, substituting the values of C and I in the Equilibrium Equation (1), we have

Y         =          400 + 0.8Y + 1,200

(Y – 0.8Y)       =          400 + 1,200

Y (1- 0.8)        =          1,600

Therefore                     Y         =          1600
0.2

Y         =          \$8,000

Therefore the equilibrium level of income is \$8,000.

Illustration 5

Presume the consumption of an economy is given by: C = 40 + 0.6 Y and the investment function is given as: I = 20 + 0.2Y. You are required to ascertain the equilibrium of national income.

Solution

In this problem, investment varies with income. Nevertheless, this will not change our method of determining equilibrium level of income.

Y         =          C + I                …………Equation (1)

C         =          40 + 0.6Y

I           =          10 + 0.2Y

Substituting the values of C and I in the Equation (1) we have

Y         =          40 + 0.6Y + 20 + 0.2Y

Y         =          60 + 0.8 Y

(Y – 0.8Y)       =          60

Y (1 – 0.8)       =          60

Y         =          60
0.2

Y         =          \$300

Hence, we find that the equilibrium level of income to be equal to \$300.

Illustration 6

For an economy, following consumption function is given: C = 120 + 0.75Y. You are required to ascertain the following:

1. If investment is a year is \$70 million what will be the equilibrium level of income or output.
1. If full employment level of income i.e. level of potential output is \$920 million what investment is required to be undertaken to ensure equilibrium at full employment.

Solution

(1)
Y         =          C + I

Y         =          120 + 0.75Y + 70

(Y – 0.75Y)     =          120 + 70

Y (1 – 0.75)     =          190

0.25Y              =          190

Y         =          \$760

(2)

To ensure full employment equilibrium, investment should be equal to the saving gap as full employment income. With the given full employment income equal to \$920 million,

SF        =          YF – CF

=          YF – (120 + 0.75Y)

=          920 – 120 – (0.75 x 920)

=          800 – 690

=          110

Thus, investment required for full employment equilibrium is \$110 millions.

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