jnu

[ritu]

1.consider an economy where bop in a particular year is characterised by...
Current acc. Balance =-400
Capital exports is =700
Imports is 800
Change in reserves =-100
Net invisible receipts 100

Find out value of exports nd value of capital inflow in economy..


2.suppose mkt rate of interst is 11% per annum.which option wud u prefer...
A. U receive rs 111 aftr one year.
Or B. U receive rs 55 aftr 6 months nd rs 55 after one year..
(m geeting the ans that option a is better but the gain is just a rupee nfew paisa..is it correct?)

[anon_econ]

Hey i'm not sure about either of them but i'll try.

in the 1st one i think capital inflow-capital exports+current a/c balance=change in reserves
and X-M+net invisible receipts=current a/c balance

in the 2nd one the present value of 111 was 100 and i calculated the present value of the other income stream as 55/1.11 + 55/1.055=101.6. so he should prefer the 2nd one. am not sure if this is the way to calulate the present value in case 2..how r u getting option a?

[aastha]

@ vasudha

for ques 2 , even i m getting that the second option is better.

[anon_econ]

but is ur method the same as mine?

[ritu]

Oh yes vasudha..its option b only...it was a typo...for first scheme its rs 100  nd for second one wot u got...my only concern was that gain in second scheme was just a ruppe nd few paisa..bt i guess its correct...we all three got same ans...nd ur method is correct as far as i think coz theres no other way to find which is a better option other than present discountef value...

[aastha]

@ vasudha

yes i ve calculated it by the same method ... my pdv for the second option is 101.68.

[a.m]

can you please elaborate the formula for calculating the present value of cash flow in this question ? And how the best option is chosen ?

[kratika]

hey...i have one small doubt in ques1...does capital exports here refer to capital outflows?

[anon_econ]

a.m just scroll up. i had shown my calculation. though i'm still a little doubtful about it.

[a.m]

@ Vasudha : yes I have gone through your answer. What i wanted to know is.. for the Present value of cash flow the formula is  PV = Future value/ (1+r)^n ? Right ?
ow did you calculate the present value for the option two. As in, The Rs 55 after 6 months and Rs 55 after one year. If you could just elaborate it a little. !
Thanks.

[anon_econ]

a.m, maybe u r right. this was precisely my doubt.
i had divided 55 by 1.055 bcoz i thought if i deposit Rs.x today i would get 5.5% interest after 6 months so the future value would be x(1.055). u r saying i would get x(1.11)^1/2, right? can u explain the logic behind it?

[anon_econ]

yes kratika i believe it does

[neha.]

The rate of interest given should be assumed as effective rate of interest ( as nothing is given) in which case (1+ i)^0.5 should be used for both, accumulated value and present value,,

Had it been nominal rate of interest convertible semi annually,, it should have been divided by 2, and (1+i) & (1+i)^2  would have been used.

[anon_econ]

neha thanks for ur reply but i cant understand..can u plz take the figures for this question n show the calculation?

[neha.]

so assuming the rate of interest is effective,,, lets find out the accumulated value of both the projects,,

Project 1: 111 (already given)

Project 2:  55(1.11)^0.5 + 55 = 112.95,,, implying project 2 is better

OR it can also be done via Present value approach:

Project 1: 111(1.11)^-1 =100

Project 2: 55(1.11)^-0.5 + 55(1.11)^-1 = 101.75,,,  implying project 2 is better

[anon_econ]

thanks a lot neha. i just have 1 final doubt (sorry for bugging u so much :|)
why do we take  55(1.11)^-0.5? what is the logic behind it? present value is the amount that we need to deposit today in order to get 55 bucks after 6 months, right?

[neha.]

No problem:)

Yeah,,, thats rite,,, thats why i have divided it by 1.11^0.5,,, so if one deposits 55*1.11^-0.5 today,,, he gets 55*1.11^-0.5*1.11^0.5 = 55 in six months time... hence 55*1.11^-0.5 is the present value of 55 due in six months time ,,,

[AJ]

@ vasudha
in ur 1st comment..
u wrote..
""capital inflow-capital exports+current a/c balance=change in reserves ""

I think it should be ..

capital exports - capital inflow + current a/c balance= change in reserves....

plss reply..

[a.m]

@ Neha and Vasudha : This question really doesnt get into my head. I understand that you've raised the first part to the power 0.5 because that is what we get after 6 months. Which is half a year ,right ? Hence 0.5 !?

Now this other question that i came across, asks :

Option 1: you receive Rs112 after one year.
Option 2: You receive rs 55 after nine months and rs 56 after one year.

Given that the market rate of interest is 12% p.a. which option is better.?

How do we go about this ? As in how do we calculate the present value for 9 months ?

[anon_econ]

AJ, i think change in reserves r the net inflow of forex. so capital inflow-capital outflow should be one of its components. plz tell me what u think.