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Sem 5 Prep
← Open Economy MacroReading a BoP statement and the investment position

Formulas for this chapter

Annualising quarterly data

Annual = Q1 + Q2 + Q3 + Q4 NEVER: Annual = any single quarter x 4

Whenever a question gives quarterly external data. If only one quarter is available, compare it with the same quarter of the previous year instead of scaling it.

Q1 to Q4
The four quarterly figures, added, not averaged and not extrapolated
Seasonality
The share of the year falling in one quarter; above 25 % means annualising that quarter overstates the year

Reserve import cover

Import cover (months) = reserves / (annual imports / 12)

Judging whether reserves are adequate to finance a deficit while an adjustment is arranged. Convert annual imports to a monthly figure first.

Reserves
Official reserve assets: gold, SDRs, the IMF reserve position and foreign currency holdings
Monthly imports
Annual imports divided by twelve, or the reported monthly bill

Net investment income from the investment position

Net income = (assets abroad x rate earned) - (foreign assets at home x rate paid)

Projecting next year's factor income line from this year's stock. Never apply a single rate to the net position; the two sides earn different rates.

Assets abroad
The nation's holdings of foreign assets, a stock at year end
Foreign assets at home
Foreign-owned holdings inside the nation, a stock at year end
Step 2 of 22
The real wordsTheory

Warning one: too much attention on goods and on short data

The first warning has two halves.

  • Too much attention is usually placed on the balance of goods, which ignores services, investment income and transfers. Chapter 2 showed how large that omission is for India.
  • Too much attention is placed on short-term data, and it is dangerous to extrapolate a year from quarterly figures.

The student's note records the risk in one phrase: misleading conclusions. A single quarter can carry a gold-import surge, a one-off aircraft purchase or a festival season, none of which will repeat.

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