Macroeconomics (7th Edition)
7th Edition
ISBN: 9780134738314
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Question
Chapter 18, Problem 18.1.11PA
To determine
The reason behind the substantial foreign debts while the country runs the current account deficit.
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Write a short essay (max 150 words) analyzing the following.
The US has been maintaining a current account deficit for a long time. It widened by
167.0billion, or 34.8percent, to647.2 billion in 2020.
Using the two-period model of the current account, explain why Covid-19 can cause this widening.
United States currently runs a significant trade deficit with the rest of the world. Research an academic journal article regarding some of our trade balances with specific countries and share what you find. For example, with whom do we run the largest deficits, with whom do we have surpluses, etc.? Do you think it is a problem if we run a trade deficit? Why or why not? In answering, keep in mind what impact a trade deficit has on other parts of our balance of payments.
68
Schmitt-Grohé, Uribe, Woodford
2.6
Exercises
Exercise 2.1 Indicate whether the following statements are true, false, or
uncertain and explain why.
1. An economy that starts with a positive net international investment
position will run a trade balance deficit at some point.
2. A country has been having trade balance deficits for 45 years. Four
decades ago, the country was a net creditor, but after so many trade
deficits it became a debtor. Clearly, this economy will have to run
trade surpluses at some point.
3. A two-period economy runs trade surpluses in both periods. It follows
that the current account in period 1 can have either sign (depending
on the magnitude of TB1), but the current account in period 2 must
be positive.
Chapter 18 Solutions
Macroeconomics (7th Edition)
Ch. 18 - Prob. 18.1.1RQCh. 18 - Prob. 18.1.2RQCh. 18 - Prob. 18.1.3RQCh. 18 - Prob. 18.1.4PACh. 18 - Prob. 18.1.5PACh. 18 - Prob. 18.1.6PACh. 18 - Prob. 18.1.7PACh. 18 - Prob. 18.1.8PACh. 18 - Prob. 18.1.9PACh. 18 - Prob. 18.1.10PA
Ch. 18 - Prob. 18.1.11PACh. 18 - Prob. 18.2.1RQCh. 18 - Prob. 18.2.2RQCh. 18 - Prob. 18.2.3RQCh. 18 - Prob. 18.2.4RQCh. 18 - Prob. 18.2.5PACh. 18 - Prob. 18.2.6PACh. 18 - Prob. 18.2.7PACh. 18 - Prob. 18.2.8PACh. 18 - Prob. 18.2.9PACh. 18 - Prob. 18.2.11PACh. 18 - Prob. 18.2.12PACh. 18 - Prob. 18.2.13PACh. 18 - Prob. 18.2.14PACh. 18 - Prob. 18.3.1RQCh. 18 - Prob. 18.3.2RQCh. 18 - Prob. 18.3.3RQCh. 18 - Prob. 18.3.4PACh. 18 - Prob. 18.3.5PACh. 18 - Prob. 18.3.6PACh. 18 - Prob. 18.3.7PACh. 18 - Prob. 18.3.9PACh. 18 - Prob. 18.3.10PACh. 18 - Prob. 18.4.2RQCh. 18 - Prob. 18.4.5PACh. 18 - Prob. 18.4.6PACh. 18 - Prob. 18.4.7PACh. 18 - Prob. 18.4.8PACh. 18 - Prob. 18.5.1RQCh. 18 - Prob. 18.5.2RQCh. 18 - Prob. 18.5.3RQCh. 18 - Prob. 18.5.4PACh. 18 - Prob. 18.5.5PACh. 18 - Prob. 18.5.6PACh. 18 - Prob. 18.5.7PACh. 18 - Prob. 18.1RDECh. 18 - Prob. 18.2RDECh. 18 - Prob. 18.3RDECh. 18 - Prob. 18.4RDECh. 18 - Prob. 18.5RDECh. 18 - Prob. 18.1CTE
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- Explain the relationship between a current account deficit or surplus and the flow of funds.arrow_forwardWhen is a trade deficit likely to work out well for an economy? When is it likely to work out poorly?arrow_forwardWhat is more important, a countrys current account balance or GDP growth? Why?arrow_forward
- International Finance and the Exchange Rate - End of Chapter Problem At a family gathering, one of your cousins says, "We spend so much more on imports than other countries spend on our exports. It isn't fair, and we should raise tariffs on imports to reduce how much we buy from other countries." How might you explain to your cousin that current account deficits aren't necessarily a sign of economic troubles to come? Our current account deficits mean we obtain cheaper goods than we could otherwise. Most economists agree that an unequal bilateral trade balance is nothing to worry about. Contrary to common belief, the current account deficit does not suggest that we are living beyond our means. The flip side of the current account deficit is a financial account surplus, which could enhance future growth if the foreign spending it entails is directed toward high-quality investments.arrow_forwardWhat is current account deficit? List down, with detailed explanations, what causes current account deficit in the economy.arrow_forwardWhat is the difference between a government deficit and a trade deficit ?arrow_forward
- Why is a nation with a current account deficit a borrower at that point in time?arrow_forward3. Briefly discuss the following statement, explaining what is right or wrong about it: "The average Current Account balance for all countries in the world was $500 billion $ in deficit, a sobering wake-up call to politicians." 11arrow_forwardCatherin Mann (2006), “The Current Account and the Budget Deficit: A Disaggregated Perspective,” in Kopcke, Tootell, and Triest (eds.), The Macroeconomics of Fiscal Policy, MIT Press In the article, Mann notes that the foreign financing of the US current account deficit has increasingly taken the form of foreigners purchasing US Treasury bonds. She is concerned that the increase of foreign holdings of US Treasury bonds may worsen the US current account deficit in the future. Which of the following statements is inconsistent with her reasons behind the concern? a. As global interest rates starts to climb, the overall payments on interest-bearing liabilities (including US Treasury bonds) will rise. b. The interest paid on US government debt (ie, US Treasury bonds) will be increasingly paid to foreign holders, setting up a negative feedback loop between fiscal deficit and current account deficit. c. The greater the US current account deficit, the larger the risk of eventual, sharp…arrow_forward
- Very short answer question What is meant by deficit in balance of payments?arrow_forward2. Many countries seem to be worried that they have negative trade balances with China. Is such a trade deficit harmful or beneficial to these economies?arrow_forward58.When countries have severe balance of payments difficulties caused by unsustainable current account deficits, they can approach the International Monetary Fund (IMF) for assistance. In providing financial assistance, the IMF generally insists that the country implement a series of policy changes designed to reduce the deficit. These programs are controversial as they tend to focus on demand reduction. Explain why demand reduction would solve a current account deficit problem. Would a program designed to increase the nation’s GDP growth rate be a method of reducing a current account deficit? Why or why not?arrow_forward
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