Exercise 2.2 Consider a two-period economy that has at the beginning of period 1 a net foreign asset position of -100. In period 1, the country runs a current account deficit of 5 percent of GDP, and GDP in both periods is 120. Assume the interest rate in periods 1 and 2 is 10 percent. 1. Find the trade balance in period 1 (TB1), the current account balance in period 1 (CA1), and the country's net foreign asset position at the beginning of period 2 (B¡). 2. Is the country living beyond its means? To answer this question find the country's current account balance in period 2 and the associated trade balance in period 2. Is this value for the trade balance feasible? [Hint: Keep in mind that the trade balance cannot exceed GDP.] 3. Now assume that in period 1, the country runs instead a much larger current account deficit of 10 percent of GDP. Find the country's net foreign asset position at the end of period 1, B¡. Is the country living beyond its means? If so, show why.

Exercise 2.2 Consider a two-period economy that has at the beginning of period 1 a net foreign asset position of -100. In period 1, the country runs a current account deficit of 5 percent of GDP, and GDP in both periods is 120. Assume the interest rate in periods 1 and 2 is 10 percent. 1. Find the trade balance in period 1 (TB1), the current account balance in period 1 (CA1), and the country's net foreign asset position at the beginning of period 2 (B¡). 2. Is the country living beyond its means? To answer this question find the country's current account balance in period 2 and the associated trade balance in period 2. Is this value for the trade balance feasible? [Hint: Keep in mind that the trade balance cannot exceed GDP.] 3. Now assume that in period 1, the country runs instead a much larger current account deficit of 10 percent of GDP. Find the country's net foreign asset position at the end of period 1, B¡. Is the country living beyond its means? If so, show why.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter23: The International Trade And Capital Flows

Section: Chapter Questions

Problem 44P: Imagine that the U.S. economy finds itself in the following situation: a government budget deficit...

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