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Chapter 10: Q 44. (page 267)

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?

Short Answer

Expert verified

Both are different.

Step by step solution

01

Step 1. 

In the US economy,

Government budget deficit = $100 billion

Total domestic physical capital investment = $1600 billion

Total domestic savings = $1500 billion

So current account balance:

Supply of financial capital = demand of financial capital

savings + current account deficit = government borrowings + physical investment

$1500 billion +current account deficit = $100 billion + $1600 billion

$1500 billion + current account deficit = $1700 billion

Current account deficit = $200 billion

02

Step 2. 

When investment rises by $50 billion, the total domestic physical capital increased to $1650 billion

Current account balance is:

Supply of financial capital = demand of financial capital

Savings + current account balance = government borrowings + physical investment

$1500 billion + current account balance = $100 billion + $1650 billion

Current account balance = $1750 billion - $1500 billion

Current account balance = $250 billion.

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Most popular questions from this chapter

In 2001, the United Kingdom's economy exported

goods worth 拢192 billion and services worth another 拢77 billion. It imported goods worth 拢225 billion and services worth 拢66 billion. Receipts of income from abroad were 拢140 billion while income payments going abroad were 拢131 billion. Government transfers from the United Kingdom to the rest of the world were 拢23 billion, while various U.K government agencies received payments of 拢16 billion from the rest of the world.

a. Calculate the U.K. merchandise trade deficit for

2001.

b. Calculate the current account balance for 2001.

c. 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.

Table 10.7 provides some hypothetical data on

macroeconomic accounts for three countries represented

by A, B, and C and measured in billions of currency

units. In Table 10.7, private household saving is SH,

tax revenue is T, government spending is G, and

investment spending is I.


ABC
SH700500600
T00500500
G600350650
I800400450

Table 10.7 Macroeconomic Accounts

a. Calculate the trade balance and the net inflow of

foreign saving for each country.

b. State whether each one has a trade surplus or

deficit (or balanced trade).

c. State whether each is a net lender or borrower

internationally and explain.

If a country is running a government budget surplus, why is (T 鈥� G) on the left side of the saving investment identity?

Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.

a. Living in an especially large country

b. Having a domestic investment rate much higher than the domestic savings rate

c. Having many other large economies geographically nearby

d. Having an especially large budget deficit

e. Having countries with a tradition of strong protectionist legislation shutting out imports

If a country is a big exporter, is it more exposed to

global financial crises?
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