4. Small Open Economy and trade deficit Suppose that Ecuador is a small open economy running a trade deficit. a. In a plot that has the interest rate in the vertical axis and S and I in the horizontal axis, show where the world interest rate r* should be relative to the "closed-economy equilibrium interest rate", rc. b. Show the effect on Savings, Investment and the real interest rate of an increase in technological progress in Ecuador that is expected to increase TFP. c. What is the effect of this shock on the trade balance? Show the trade balance in your plot.

4. Small Open Economy and trade deficit Suppose that Ecuador is a small open economy running a trade deficit. a. In a plot that has the interest rate in the vertical axis and S and I in the horizontal axis, show where the world interest rate r* should be relative to the "closed-economy equilibrium interest rate", rc. b. Show the effect on Savings, Investment and the real interest rate of an increase in technological progress in Ecuador that is expected to increase TFP. c. What is the effect of this shock on the trade balance? Show the trade balance in your plot.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter23: The International Trade And Capital Flows

Section: Chapter Questions

Problem 46P: Imagine that the economy of Germany finds itself in the following situation: the government budget...

See similar textbooks

Similar questions

What problem is most directly associated with a trade deficit? O fixed exchange rates O devaluation of a nation's currency O unemployment in import industries. O inflation
9. If a large nation experiences growth of its abundant input, other things held constant, one would expect that in the post-growth trade equilibrium, a. Its welfare increases not only because of outward shift in the PPF but also because of the more favourable terms of trade. b. Its welfare decreases because of the adverse effects on its terms of trade as well as due to the excess supply of its export good. c. Its welfare increases because of the growth of the input but decreases because of the adverse terms of trade, with the overall effect being uncertain. d. Its welfare will increase. CHOOSE ONE ANSWER ONLY.
1. Which of the following falls under the current account of the Philippines? a. The value of the Philippines' export of goods increased due to the increase in demand from China. b. The value of the Philippines' import of goods increased due to a high domestic demand for raw materials. c. Both a and b d. None of the above 2. What is the difference between current account and financial account? a. Current account measures the difference between import and export while financial account measures sales of import and export. b. Current account measures transactions that do not create liabilities while financial account measures those that do. c. Current account measures transactions that create liabilities while financial account measures those that don't. d. None, they are the same. 3. Which of the following statements is correct? a. There is trade surplus when import equals export. b. There is trade surplus when export equals import. c. There is trade deficit when export is greater than…
Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Is this possible?
State whether each of the following events Involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy: Mexico Imports sen4ces from Japan Mexico exports goods to Canada U.S. investors receive a return from past financial investments in Mexico
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.
If domestic Investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?
Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?
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. Living In an especially large country Having a domestic investment rate much higher than the domestic savings rate Having many other large economies geographically nearby Having an especially large budget deficit Having countries with a tradition of strong protectionist legislation shutting out imports
How does the bottom portion of Figure 23.3, showing the international flow of investments and capital, differ from the upper portion?
If the trade deficit of the United States increases, how is the current account balance affected?
provides some hypothetical data on macroeconomicaccountsforthreecountriesrepresented by A, B, and C and measured in billions of currency units. In Table, private household saving is SH, tax revenue is T, government spending is G, and investment spending is I. 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.