QUESTIONS AND PROBLEMS

QUESTIONS

1. If imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports?
2. What is included in the current account balance?
3. Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Explain why such a statement is economically impossible.
4. A government official announces a new policy. The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is contradictory.
5. In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?
6. If countries reduced trade barriers, would the international flows of money increase?
7. Does a trade surplus mean an overall inflow of financial capital to an economy, or an overall outflow of financial capital? What about a trade deficit?
8. What are the main components of the national savings and investment identity?
9. Many think that the size of a trade deficit is due to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.
10. If you observed a country with a rapidly growing trade surplus over a period of a year or so, would you be more likely to believe that the country’s economy was in a period of recession or of rapid growth? Explain.
11. Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Is this possible?
12. Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of $100 billion, total domestic savings of $1,500 billion, and total domestic physical capital investment of $1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by $50 billion, while the budget deficit and national savings remain the same?
13. When is a trade deficit likely to work out well for an economy? When is it likely to work out poorly?
14. What is more important, a country’s current account balance or GDP growth? Why?
15. What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?
16. What is the difference between trade deficits and balance of trade?
17. Will nations that are more involved in foreign trade tend to have higher trade imbalances, lower trade imbalances, or is the pattern unpredictable? Include examples of specific countries in your answer.
18. Some economists warn that the persistent trade deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.
19. In 2001, the United Kingdom’s economy exported goods worth £192 billion and services worth another £77 billion. It imported goods worth £225 billion and services worth £66 billion. Receipts of income from abroad were £140 billion while income payments going abroad were £131 billion. Government transfers from the United Kingdom to the rest of the world were £23 billion, while various U.K government agencies received payments of £16 billion from the rest of the world.

1. Calculate the U.K. merchandise trade deficit for 2001.
2. Calculate the current account balance for 2001.
3. Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001.