Assume a U.S. firm buys (imports) $5 million (in U.S. dollars) of foreign goods. That transaction by itself increases the trade deficit by $5 million. But, the $5 million will flow back to the United States to purchase either (i) U.S. goods and services or (ii) U.S. assets. • How does the way the $5 million comes back to the United States determine whether there will be balanced trade or a trade deficit? • How does the U.S. economy benefit from either transaction (the foreign purchase of U.S. goods and services [exports] or the purchase of U.S. assets)?

Assume a U.S. firm buys (imports) $5 million (in U.S. dollars) of foreign goods. That transaction by itself increases the trade deficit by $5 million. But, the $5 million will flow back to the United States to purchase either (i) U.S. goods and services or (ii) U.S. assets. • How does the way the $5 million comes back to the United States determine whether there will be balanced trade or a trade deficit? • How does the U.S. economy benefit from either transaction (the foreign purchase of U.S. goods and services [exports] or the purchase of U.S. assets)?

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...

See similar textbooks

Similar questions

How did large trade deficits hurt the East Asian countries in the mid 1980s? (Recall that trade deficits are equivalent to inflows of financial capital from abroad.)
What determines the size of a countrys trade deficit?
If imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports?
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?
this question has three questions . What proportion of this country’s total gross capital formation (or investment) can be financed from national savings, and what part must be financed from external resources? What are the various forms these external resources could take? show in graph how the current account got a deficit of 12% GDP and the budget deficit of 3%. Suppose a country has a large current account deficit (in the vicinity of 12% of GDP). It has a gross capital formation rate of 28% of GDP. The country has an overall budget deficit of 3% of GDP. The share of Household and NPISHs Final Consumption Expenditure is 68% of GDP and that of General Government Final Consumption Expenditure is 12%. What proportion of this country’s total gross capital formation (or investment) can be financed from national savings and what part must be financed from external resources? What are the various forms these external resources could take?
2 - What is the other name for the difference between export and import?A) Net exportsB) Foreign trade deficitC) Foreign TradeD) Budget deficitE) Current Account Deficit
Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso-denominated external assets are 70 billion pesos (P) and peso-denominated external liabilities are 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1.5 = $US1. a) What is the peso value of Argentina's total external wealth? Is it a net debtor or creditor? b) Suppose that Argentina changes its exchange rate to P2.3 = $US1. How does the external wealth of Argentina change when this occurs?
Suppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of $1 = 6 yuan. Also suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert $10 billion per day of dollars into yuan, while the people who are wanting to convert yuan into dollars are asking to convert 36 billion yuan into dollars. What will happen to the size of China’s official reserves of dollars? a. Increase. b. Decrease. c. Stay the same.
8. Suppose that last year, the nominal exchange rate between the Japanese yen and the British pound was ¥150.0 per £1.0, one unit of Japanese output cost ¥1300, and one unit of British output cost £8.0.a. What was the real exchange rate between the U.K. and Japan last year, expressed as the cost of British output (i.e. – the quantity of Japanese output that exchanges for 1 unit of British output)? In which country were goods more expensive last year?
Suppose the Current Account has a deficit of 300 and we invest 200 overseas. What inflow of foreign investment is needed to provide Balance of payment equilibrium? Suppose we import 500 and the capital account has a deficit of 400. What level of exports would generate Balance of Payment equilibrium? Suppose we are in Balance of Payment equilibrium with a trade deficit of 300. What happens to the trade deficit if the public sector sells 100 in securities to the foreign sector to finance the budget deficit? True or False and explain: Currently the foreign sector holds 28.5% of our $24 trillion national debt. If we reduced the foreign sectors holding our trade balance would improve. True of False and explain: Investment is critical to economic development. Developing countries have immature domestic financial sectors, therefore they should pursue trade policies designed to produced trade surpluses.