CAt = B*t − B*t-1 (2) A) Which conditions are needed to show that B*2 = 0? B) Suppose that the country runs perpetual trade deficits. What can you tell about the country’s initial net foreign asset position? Justify your answer. C) If the country starts period 1 with no debt or assets, what can you say about the current account in periods 1 and 2?
Question 2
Consider an economy that lasts for two periods, period 1 and period 2. Let T B1 denotes the trade balance in period t, CA1 the current account balance in period 1, and B*1 the country’s net international investment position at the end of period 1. Let r denote the interest rate paid on assets held for one period. Assume net international payments to employees, net unilateral transfers, and valuation changes are always equal to zero, so that in period t = 1, 2:
CAt =rB*t-1 =TBt (1)
and
CAt = B*t − B*t-1 (2)
A) Which conditions are needed to show that B*2 = 0?
B) Suppose that the country runs perpetual
C) If the country starts period 1 with no debt or assets, what can you say about the current account in periods 1 and 2?
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