Explain the three different viewpoints (meanings) of the current account balance. Discuss the macroeconomic interpretations of a current account deficit.
What will be an ideal response?
POSSIBLE RESPONSE: The current account includes all debit and credit items that are exports and imports of goods and services, income receipts and income payments, and gifts. The financial account and the changes in official international reserves are the other parts of the balance of payments of a country. The current account balance must equal net foreign investment (the increase in the country's foreign financial assets minus the increase in the country's foreign financial liabilities). If a country has a current account deficit, then its net foreign investment is negative, and it is acting as a net borrower from the rest of the world. The second meaning of the current account is associated with the national savings and investments. A country can either invest its national savings domestically or abroad. That means that the net foreign investment is the difference between national savings and domestic investments. A current account deficit means that a country's domestic investments exceed its savings. The third view on the current account is as a difference between domestic product and national expenditure. From this viewpoint a deficit on the current account implies that the country buys more goods and services than it produces.
You might also like to view...
"Cheap foreign wages" is a poor argument for protection because it fails to recognize the importance of productivity. Which of the following does NOT contribute to increasing productivity?
A) Education and training B) Government subsidies C) Infrastructure D) Capital
When personal income is greater than national income,
a. personal income taxes are less than transfer payments b. personal income taxes are less than Social Security contributions c. income that is earned but not received is greater than income that is received but not earned d. income that is received but not earned is greater than income that is earned but not received e. there is no difference between income that is earned and not received and income that is received and not earned
By selling hardcover books to die-hard fans and paperback books to less enthusiastic readers, the publisher is able to price discriminate and raise its profits
a. True b. False Indicate whether the statement is true or false
Internal scale economies occur when
A. expansion of output by a firm leads to greater specialization of labor. B. industry growth leads to a greater diffusion of knowledge among firms. C. expansion in an industry drives down input prices. D. a firm pays higher input prices to expand production.