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Chapter 10: Q. 10 (page 265)

Explain the relationship between a current account deficit or surplus and the flow of funds.

Short Answer

Expert verified

Flow of funds is a part of current account surplus/deficit.

Step by step solution

01

Step1. Introduction

Imports refer to the buying of goods/services from foreign countries.

Exports refer to the selling of goods/services to foreign countries.

The international flow of funds refers to the flow of financial investments.

Current account balance refers to the trade surplus/deficit.

02

Step2. Explanation

The current account balance refers to the trade balance which is the net exports (exports minus imports). When a country runs a trade deficit, it imports more goods and services than it exports. Think of the US as an example--it pays USD for foreign imports, and this excess amount of USD comes back to the US in the form of investment in US financial assets (bonds, stocks, real estate, etc.).

A trade surplus means an overall outflow of financial investment capital, as domestic investors put their funds abroad; a trade deficit is exactly equal to the overall or net inflow of foreign investment capital from abroad.

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Most popular questions from this chapter

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.

The GDP for the United States is \(18,036billion and its current account balance is -\)484billion. What percent of GDP is the current account balance?

If imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports?

If countries reduced trade barriers, would the

international flows of money increase?

When is a trade deficit likely to work out well for an economy? When is it likely to work out poorly?
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