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Chapter 23: Q. 46 (page 578)

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1%of Germany’s GDP; private savings is 20%of GDP, and physical investment is 18%of GDP.

a. Based on the national saving and investment identity, what is the current account balance?

b. If the government budget surplus falls to zero, how will this affect the current account balance?

Short Answer

Expert verified

(a) The current account balance is 3%.

(b) The new current account balance is2%.

Step by step solution

01

Step1. Introduction.

The savings-investment identity is-

Assuming a trade surplus,

X-M= S + T-G - I

Let us assume,

GDP=100

Budget Surplus: T-G=1

Private savings: P=20

Investments: I=18

02

Step2. Explanation

(a)

Current account balance (trade surplus):

20+1-18=3

i.e.3%.

(b) If government surplus falls to zero, current account balance falls too.

It becomes:

20+0-18=2

i.e.2%.

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Most popular questions from this chapter

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.

How does the bottom portion of Figure 23.3, showing the international flow of investments and capital, differ from the upper portion?

State whether each of the following events involves a financial flow to the U.S. economy or away from the U.S. economy:

  1. Export sales to Germany
  2. Returns paid on past U.S. financial investments in Brazil
  3. Foreign aid from the U.S. government to Egypt
  4. Imported oil from the Russian Federation
  5. Japanese investors buying U.S. real estate

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.

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.

State whether each of the following events involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy:

a. Mexico imports services from Japan

b. Mexico exports goods to Canada

c. U.S. investors receive a return from past financial investments in Mexico
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