Chapter 23

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?

Will nations that are more involved in foreign trade tend to have higher trade imbalances, lower trade imbalances, or is the pattern unpredictable?

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.

In 2001, the United Kingdom's economy exported goods worth $\pounds 192$ billion and services worth another E77 billion. It imported goods worth $\pounds 225$ billion and services worth $\pounds 66$ billion. Receipts of income from abroad were $\pounds 140$ billion while income payments going abroad were $\pounds 131$ billion. Government transfers from the United Kingdom to the rest of the world were $\pounds 23$ billion, while various U.K government agencies received payments of $\pounds 16$ 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.

Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of $\mathrm{\$}100$ billion, total domestic savings of $\mathrm{\$}1,500$ billion, and total domestic physical capital investment of $\mathrm{\$}1,600$ 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?

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of $1\mathrm{\%}$ of Germany's GDP; private savings is 20\% of GDP; and physical investment is 18\% of GDP. a. Based on the national saving and investment identity, what is the current account balance? b. If the government budget surplus falls to zero, how will this affect the current account balance?