Consider the economy of Opulenza. In Opulenza, domestic investment of $400 million earned $20 million in capital gains during 2012. Opulenzans purchased $120 million in new foreign assets during the year; foreigners purchased $160 million in Opulenzan assets. Assume the valuation effects total $1 million in capital gains. Note that we need to assume a value for the capital account. We will assume KA = 0 in the following transactions.
a. Compute the change in domestic wealth in Opulenza.
b. Compute the change in external wealth for Opulenza.
c. Compute the total change in wealth for Opulenza.
d. Compute domestic savings for Opulenza.
e. Compute Opulenza’s current account. Is the CA in deficit or surplus?
f. Explain the intuition for the CA deficit/surplus in terms of savings in Opulenza, financial flows, and its domestic/external wealth position.
g. How would a depreciation in Opulenza’s currency affect its domestic, external, and total wealth? Assume that foreign assets owned by Opulenzans are denominated in foreign currency.