International Economics Study Set 9
Quiz 15 :
Payments Among Nations
Disagree, at least as a general statement. One meaning of a current account surplus is that the country is exporting more goods and services than it is importing. One might easily judge that this is not good-the country is producing goods and services that are exported, but the country is not at the same time getting the imports of goods and services that would allow it do more consumption and domestic investment. In this way a current account deficit might be considered good-the extra imports allow the country to consume and invest domestically more than the value of its current production. Another meaning of a current account surplus is that the country is engaging in foreign financial investment-it is building up its claims on foreigners, and this adds to national wealth. This sounds good, but as noted above it comes at the cost of foregoing current domestic purchases of goods and services. A current account deficit is the country running down its claims on foreigners or increasing its indebtedness to foreigners. This sounds bad, but it comes with the benefit of higher levels of current domestic expenditure. Different countries at different times may weigh the balance of these costs and benefits differently, so that we cannot simply say that a current account surplus is better than a current account deficit.
Disagree. If the country has a surplus (a positive value) for its official settlements balance, then the value for its official reserves balance must be a negative value of the same amount (so that the two add to zero). A negative value for this asset item means that funds are flowing out in order for the country to acquire more of these kinds of assets. Thus, the country is increasing its holdings of official reserve assets.
a.CA = I f , so if net foreign investment increases, then the value of the current account increases. b.If both exports (a positive item) and imports (a negative item) increase by $10 billion, the value of the current account balance stays the same. c.CA = Y - E, so the combination of an increase in production (Y) by $100 billion and an increase in expenditures (E) by $150 billion results in a decrease in the value of the current account balance. d.The transport equipment is an export of goods, so it is a positive item in current account. It must be paired with a negative item of the same amount showing the unilateral transfer (gift). Because both of these items are included in the current account, the value of the current account balance stays the same.