Deck 12: National Income Accounting and the Balance of Payments

Question 1

In 2006, the U.S. had a:

A) current account deficit and a capital and financial account surplus.
B) current account surplus and a capital and financial account deficit.
C) current account deficit and a capital and financial account deficit.
D) current account surplus and a capital and financial account surplus.

Answer 1

current account deficit and a capital and financial account surplus.

Question 2

GDP is a conservative estimate of national production. Explain why this statement is true.

Answer 2

Gross Domestic Product (GDP) is the market value of all final goods and services a country produces in a year. In other words, GDP is total output, measured in the country's currency, with each good or service valued at its current market price. Not every market transaction is included in GDP. First, in our definition of GDP, "final goods and services" means that we count the value of goods and services sold only to end-users. By counting only the final value of the product, we capture the value added by all of the inputs embodied in the good or service. Second, the calculation of GDP includes only reported market transactions. If a good or service is produced but not sold in the market, it is excluded from GDP. This means that GDP inherently undercounts the total production of goods and services in any economy. Third, activities that are not reported for whatever reason (e.g., tax evasion, illegal earnings) are also not included in the calculation of GDP. As a result of these exclusions, a country's GDP is understated and provides a conservative estimate of the country's total economic activity.

Question 3

Describe the various components of GDP. What are the relative sizes of these components for the U.S. economy?

Answer 3

GDP is composed of four components. These components are consumption by the public (C); gross private domestic investment (I); government spending on goods and services (G); and net exports [exports (X) minus imports (M)]. For the U.S., public consumption is approximately 68 percent of GDP. Investment and government spending accounted for approximately 19 percent and 17 percent of GDP, respectively. Finally, exports minus imports account for a negative 4 percent of real GDP indicating that the U.S. imported more goods and services than it exported.

Question 4

Describe the relationship between GDP and the trade balance.

Question 5

Explain how the phrase "selling the back forty" is related to the trade balance.

Question 6

What is meant by intertemporal trade?

Question 7

How are saving, investment, taxes, and government spending on goods and services related to the trade balance?

Question 8

Suppose that a country had a trade deficit and wanted to reduce it. How could the country go about accomplishing this?

Question 9

What factors might lead a country to have a trade surplus?

Question 10

List and describe the components of the current account balance.

Question 11

A country with a current account deficit must have a capital and financial account surplus. Explain why this statement is true.

Question 12

The sum of all current account surpluses and deficits in the world economy does not sum to zero. How can this happen?