Question 1

Give an intuitive explanation that captures the relationship between the current account position (surplus or deficit) and the role of country as a net borrower or lender.

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Question 2

What two reasons could cause a change in a nation's external wealth?

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Question 3

Suppose the following transactions take place: (1) A U.S. book publisher sells $20,000 of books to a Chinese firm. The firm pays for the books by using its Chinese-based credit card company.; (2) Vlad, a Russian citizen working in New York, earned $6,000 last year working at a factory owned by a U.S .company, and (3) BNP Paribas (a French bank) has just purchased 20% of outstanding stock in First Commercial Bank (U.S.) for $200,000 million from Warren Buffet (a U.S. citizen). Buffet takes the check and puts it in his U.S. bank account. Assuming we started with a trade deficit of zero. What will these transactions do to our trade deficit?

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Question 4

Many U.S. residents complain that the nation should take care of its own needs before being generous with taxpayer funds donated to foreign lands. Based on the discussion in "Headlines: Are Rich Countries "Stingy" with Foreign Aid?," analyze that complaint.

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Question 5

Suppose the following transactions take place: (1) A U.S. book publisher sells $20,000 of books to a Chinese firm. The Chinese firm pays for the books by using its China-based credit card company; (2) Vlad, a Russian citizen working in New York, earned $6000 last year working at a factory owned by a U.S. company, and (3) BNP Paribas (a French bank) has just purchased 20% of outstanding stock in First Commercial Bank (a U.S. bank) for $200,000 million from Warren Buffet (a U.S. citizen). Warren Buffet takes the check and puts it in his U.S. bank account. What will these transactions do to net external wealth?

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Question 6

Occasionally, dramatic changes in financial account balances are recorded yearly. How is the financial account balance recorded, and what factors may influence the calculation?

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Question 7

The United States has experienced large and growing current account deficits for more than 20 years, whereas Japan has experienced large and growing current account surpluses for roughly the same period. The U.S. economy has grown at faster rates than Japan's over the past 10 years. What might explain the difference? Relate your answer to the relationship between the current account and GDP.

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Question 8

Your text authors state that in the long run a nation cannot sustain current account deficits and that every nation must eventually "live within its means." What does that mean? What implications are there for the United States?

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Question 9

Explain why a nation with a current account deficit is a net external borrower, while a nation with a current account surplus is a net external lender.

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Question 10

Over the past 30 years, the United States has experienced rising CA deficits. What have been the effects of the deficits? What fallout has there been on the U.S. economy?

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Question 11

The current account balance is equivalent to an excess of domestic expenditure (C + I +
G) over gross national domestic income (GNDI). Some say a government budget deficit adds to this problem. Why?

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Question 12

What role do exchange rates play in the net external wealth of a country? Illustrate by explaining what an exchange rate appreciation can do to a country holding an asset denominated in foreign currency.

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Question 13

When analyzing the financial account of the balance of payments, there may be a situation in which the overall balance is not equal to zero. What could cause this to happen and how does BOP accounting handle it?

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Question 14

Suppose consumers decide to save a smaller proportion of their income. What are the implications for the current account? The financial account?

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Question 15

What is meant by "twin deficits"?

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Question 16

Explain why sometimes the balance of payments does not balance to zero. What remedy do we apply to fix the problem?

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Quiz 16: National and International Accounts: Income, Wealth, and the Balance of Payments