Review Questions

12 . If a country is running a government budget surplus, why is (T – G) on the left side of the saving- investment identity? 13 . What determines the size of a country’s trade deficit? 14 . 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? 15 . Why does a recession cause a trade deficit to increase? 16 . Both the United States and global economies are booming. Will U.S. imports and/or exports increase? 17 . For each of the following, indicate which type of government spending would justify a budget deficit and which would not. a. Increased federal spending on Medicare b. Increased spending on education c. Increased spending on the space program d. Increased spending on airports and air traffic control 18 . How did large trade deficits hurt the East Asian countries in the mid 1980s? (Recall that trade deficits are equivalent to inflows of financial capital from abroad.) 19 . Describe a scenario in which a trade surplus benefits an economy and one in which a trade surplus is occurring in an economy that performs poorly. What key factor or factors are making the difference in the outcome that results from a trade surplus? 20 . The United States exports 14% of GDP while Germany exports about 50% of its GDP. Explain what that means. 21 . 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. a. Living in an especially large country b. Having a domestic investment rate much higher than the domestic savings rate c. Having many other large economies geographically nearby d. Having an especially large budget deficit e. Having countries with a tradition of strong protectionist legislation shutting out imports

Review Questions

22 . If imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports? 23 . What is included in the current account balance? 24 . In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced? 25 . Does a trade surplus mean an overall inflow of financial capital to an economy, or an overall outflow of financial capital? What about a trade deficit? 26 . What are the two main sides of the national savings and investment identity? 27 . What are the main components of the national savings and investment identity? 28 . When is a trade deficit likely to work out well for an economy? When is it likely to work out poorly? 29 . Does a trade surplus help to guarantee strong economic growth? 30 . What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP? 31 . What is the difference between trade deficits and balance of trade?

Critical Thinking Questions

32 . Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Explain why such a statement is economically impossible. 33 . A government official announces a new policy. The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is contradictory. 34 . If a country is a big exporter, is it more exposed to global financial crises? 35 . If countries reduced trade barriers, would the international flows of money increase? 36 . Is it better for your country to be an international lender or borrower? 37 . 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. 38 . If you observed a country with a rapidly growing trade surplus over a period of a year or so, would you be more likely to believe that the country's economy was in a period of recession or of rapid growth? Explain. 39 . 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? 40 . What is more important, a country’s current account balance or GDP growth? Why? 41 . Will nations that are more involved in foreign trade tend to have higher trade imbalances, lower trade imbalances, or is the pattern unpredictable? 42 . Some economists warn that the persistent trade deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.

Problems

43 . In 2001, the United Kingdom's economy exported goods worth £192 billion and services worth another £77 billion. It imported goods worth £225 billion and services worth £66 billion. Receipts of income from abroad were £140 billion while income payments going abroad were £131 billion. Government transfers from the United Kingdom to the rest of the world were £23 billion, while various U.K government agencies received payments of £16 billion from the rest of the world. a. Calculate the U.K. merchandise trade deficit for 2001. b. Calculate the current account balance for 2001. c. Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001. 44 . Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of $100 billion, total domestic savings of $1,500 billion, and total domestic physical capital investment of $1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by $50 billion, while the budget deficit and national savings remain the same? 45 . 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.