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Chapter 29: Problem 8

(Related to Solved Problem 29.1 on page 1034 ) In early 2017 . a Chinese news service noted, "The country will continue to run a current account surplus, as well as a ... financial account deficit in 2017 ." After reading this account, a student comments, "I thought Chinese exports were very strong, so I don't understand why the country is expected to run a financial account deficit." Clear up the student's confusion.

Short Answer

Expert verified
The term 'financial account deficit' does not mean that China's exports are weak. Rather, it means that China is using the money it earns from its strong exports - which cause the current account surplus - to buy or invest more in foreign assets. Hence, while the money is flowing into China due to exports (current account surplus), it is flowing out of the country because of foreign investments (financial account deficit).

Step by step solution

01

Understanding Current Account

The current account measures the flow of goods, services, and investments into and out of the country. When a country exports more than it imports, it runs a current account surplus. The comment on 'Chinese exports being very strong' suggests that China is likely selling more to other countries than it is buying, hence the current account surplus.
02

Understanding Financial Account

The financial account measures increases or decreases in international ownership of assets, whether they be individuals, businesses, governments, or central banks. When a country buys more assets (like stocks, bonds, physical plants, real estate, etc.) from foreign countries than it sells, it has a financial account deficit.
03

Relating Current and Financial Account

With a current account surplus, China earns more money from its robust exports. However, if it then uses that income to invest in foreign assets rather than its domestic economy, it means the money is flowing out of the country, hence creating a financial account deficit. That's likely why despite having strong exports, China is still expected to run a financial account deficit.

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Most popular questions from this chapter

(Related to Solved Problem 29.1 on page 1034 ) An editorial in the Wall Street Journal in 2017 made the following observation: "When the U.S. has a current- account deficit it has to have a capital-account surplus of the same amount." Briefly explain whether you agree with this observation.

Why might "the continued willingness of foreign investors to buy U.S. stocks and bonds and foreign companies to build factories in the United States" result in the United States running a current account deficit?

According to an article in the Economist, "countries with persistent current- account deficits tend to have higher real interest rates than surplus countries." What do high interest rates have to do with current account deficits??

An article in the Wall Street Journal stated, "With the uncertainty lifting and economy doing well, the European Central Bank is more likely to taper the massive stimulus program that has helped keep pressure on the euro." a. What does the article mean by "pressure on the euro"? b. What is the article referring to by the "massive stimulus program" by the European Central Bank, and why would it keep pressure on the euro? c. If you ran a business in the euro zone that exports to the United States and Japan, would the tapering (cutting back) of the massive stimulus program help you? If you were a consumer in the euro zone, would the tapering of the program help you? Briefly explain.

Why is the United States sometimes called the "world's largest debtor"?
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