Principles of Economics

Steven A. Greenlaw, David Shapiro

Chapter 23

The International Trade and Capital Flows - all with Video Answers

Educators

Chapter Questions

Problem 1

If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 2

If the trade deficit of the United States increases, how is the current account balance affected?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 3

State whether each of the following events involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy:
a. Mexico imports services from Japan
b. Mexico exports goods to Canada
c. U.S. investors receive a return from past financial investments in Mexico

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 4

In what way does comparing a country's exports to GDP reflect its degree of globalization?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 5

At one point Canada's GDP was $\$ 1,800$ billion and its exports were $\$ 542$ billion. What was Canada's export ratio
at this time?

Riham Bassal

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Problem 6

The GDP for the United States is $\$ 18,036$ billion and its current account balance is $-\$ 484$ billion. What percent of GDP is the current account balance?

Majid Borumand

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Problem 7

Why does the trade balance and the current account balance track so closely together over time?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 8

State whether each of the following events involves a financial flow to the U.S. economy or away from the U.S. economy:
a. Export sales to Germany
b. Returns paid on past U.S. financial investments in Brazil
c. Foreign aid from the U.S. government to Egypt
d. Imported oil from the Russian Federation
e. Japanese investors buying U.S. real estate

Rashmi Sinha

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Problem 9

How does the bottom portion of Figure $23.3,$ showing the international flow of investments and capital, differ from the upper portion?

Majid Borumand

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Problem 10

Explain the relationship between a current account deficit or surplus and the flow of funds.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 11

Using the national savings and investment identity, explain how each of the following changes (ceteris paribus)
will increase or decrease the trade balance:
a. A lower domestic savings rate
b. The government changes from running a budget surplus to running a budget deficit
c. The rate of domestic investment surges

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 12

If a country is running a government budget surplus, why is ( $\mathrm{T}-\mathrm{G}$ ) on the left side of the saving-investment identity?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 13

What determines the size of a country's trade deficit?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 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?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 15

Why does a recession cause a trade deficit to increase?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 16

Both the United States and global economies are booming. Will U.S. imports and/or exports increase?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 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

Oluwadamilola Ameobi

Oluwadamilola Ameobi

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Problem 18

How did large trade deficits hurt the East Asian countries in the mid 1980 s? (Recall that trade deficits are equivalent to inflows of financial capital from abroad.)

Oluwadamilola Ameobi

Oluwadamilola Ameobi

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Problem 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?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

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Problem 20

The United States exports $14 \%$ of GDP while Germany exports about $50 \%$ of its GDP. Explain what that means.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 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

Majid Borumand

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Problem 22

If imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 23

What is included in the current account balance?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 24

In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 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?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 26

What are the two main sides of the national savings and investment identity?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 27

What are the main components of the national savings and investment identity?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 28

When is a trade deficit likely to work out well for an economy? When is it likely to work out poorly?

Majid Borumand

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Problem 29

Does a trade surplus help to guarantee strong economic growth?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 30

What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 31

What is the difference between trade deficits and balance of trade?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 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.

Natalie Britton

Natalie Britton

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Problem 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.

Natalie Britton

Natalie Britton

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Problem 34

If a country is a big exporter, is it more exposed to global financial crises?

Natalie Britton

Natalie Britton

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Problem 35

If countries reduced trade barriers, would the international flows of money increase?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 36

Is it better for your country to be an international lender or borrower?

Prashant Bana

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Problem 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.

Majid Borumand

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Problem 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.

Taylor Jordan

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Problem 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?

Majid Borumand

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Problem 40

What is more important, a country's current account balance or GDP growth? Why?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 41

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

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 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.

Majid Borumand

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Problem 43

In 2001, the United Kingdom's economy exported goods worth $£ 192$ billion and services worth another E77 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.

Majid Borumand

Numerade Educator

Problem 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?

Majid Borumand

Numerade Educator

Problem 45

Table 23.7 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 $23.7,$ private household saving is $\mathrm{SH}$, tax revenue is $\mathrm{T},$ government spending is $\mathrm{G},$ and investment spending is I.
a. Calculate the trade balance and the net inflow of foreign saving for each country.
b. State whether each one has a trade surplus or deficit (or balanced trade).
c. State whether each is a net lender or borrower internationally and explain.

Majid Borumand

Numerade Educator

Problem 46

Imagine that the economy of Germany finds itself in the following situation: the government budget has
a surplus of $1 \%$ 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?

Majid Borumand

Numerade Educator