If a country runs a trade balance surplus will it necessarily be accumulating net foreign assets?.
Consider a two-period economy that has at the beginning of period 0 net foreign assets of -100 : In Show more Consider a two-period economy that has at the beginning of period 0 net foreign assets of -100 : In period 0 the country runs a current account decit of 5 percent of GDP and GDP in both periods is 120. Assume the interest rate in periods 0 and 1 is 10 percent. 1. Find the trade balance in period 0 the current account balance in period 0; and the countrys external wealth at the beginning of period 1. 2 Is the country living beyond its means? To answer this question nd the countrys current account balance in period 1 and the associated trade balance in period 1. Is this value for the trade balance feasible? [Hint: Keep in mind that since expenditures cannot be negative the trade balance cannot exceed GDP]. 3 Now assume that in period 0 the country runs instead a much larger current account decit of 10 percent of GDP. Find the countrys external wealth at the end of period 0. Is the country living beyond its means? If so why? . Can a country simultaneously run a trade balance surplus and a current account decit? (a) No because the trade balance and the current account are always equal. (b) Yes if imports exceed exports and the country is a big net creditor that earns large interest income. 1(c) Yes if exports exceed imports and the country is a big net creditor that earns large interest income. (d) Yes if exports exceed imports and the country is a big net debtor paying large interest income. (e) Yes if imports exceed exports and the country is a big net debtor paying large interest income. 2. If a country runs a trade balance surplus will it necessarily be accumulating net foreign assets? (a) No it will be necessarily running down its net foreign assets. (b) Yes the change in net foreign assets is equal to the trade balance surplus. (c) Not necessarily. If the country has negative investment income it might run a current account decit in spite of its trade balance surplus. (d) Not necessarily. If the country receive large payments for the work of its citizens abroad it might run a current account decit in spite of its trade balance decit. (e) None of the above. 3. Can a country with positive net foreign assets receive negative investment income? (a) Yes if the average return on its foreign assets exceeds the average return on its foreign liabilities. (b) No investment income cannot be negative. (c) Yes if the average return on its foreign liabilities exceeds the average return on its foreign assets. (d) Yes if exports exceed imports. (e) Yes if imports exceed exports. 4. If investment exceeds savings (a) the trade balance is positive (b) the trade balance is negative (c) net foreign assets increase over time (d) net foreign assets fall over time (e) none of the above 5. If an American citizen purchases a 100 dollar Italian bottle of wine in a restaurant in Beverly Hills CA and pays with US dollars this transaction will show up in the US Balance of Payments as (a) +100 in the current account -100 in the current account. (b) -100 in the current account +100 rise in net foreign assets. 2(c) -100 in the current account +100 decline in net foreign assets. (d) none of the above 6. If a US citizen receives 20000 dollars in dividends from a Japanese corporation and these funds are deposited in his Citibank account this transaction will show up in the US Balance of Payments as (a) +20000 in the current account 20000 rise in net foreign assets. (b) +20000 in the current account -20000 in the current account. (c) +20000 increase in net foreign assets 20000 decline in net foreign assets. (d) +20000 increase in net foreigh assets -20000 in the capital account. (e) -20000 in the current account 20000 rise in net foreign assets. 7. If a country has positive net foreign assets then in the future (a) the country must run a trade surplus every year. (b) the country must run a trade balance every year (c) the country must run a trade surplus at least one year (d) the country must run a trade decit at least one year (e) the country must run a current account decit every year. Show less
If a country runs a trade balance surplus will it necessarily be accumulating net foreign assets?
