Problem Session #1
True, False, Uncertain. Explain your answers:
1. A Canadian producer sells computer software to a French firm receiving a cheque of
50,000 Euro. The Canadian firm obtains dollars from the Bank in exchange for this cheque.
As a result the Canadian capital account improves
2. If there is a crisis in Argentina, and exports of US goods to Argentina fall, the current
account of the US will worsen.
3. A country with current account deficit must be suffering from poor economic management
4. An increase in government deficits necessarily increases the current account deficits by the
same magnitude
5. A Canadian buys a Japanese car, paying by writing a check on an account with a bank in
Vancouver. This transaction will be accounted for as a current account Canadian import
and a financial account Canadian asset import.
6. In a open economy, private saving, Sp, is equals to I + CA
Short Answers/ Calculations
1.
Discuss the effects of government deficits on the current account
Calculations
1. Suppose that the debt of the country at t=0 is D0=0. If the current account at t=1 is CA1=-100,
what should D1 be? If the world interest rate is 10%, how much will net factor payments from
abroad increase or decrease at t=1?
2. Suppose that at t=1 consumption is C1=400, investment is I1=300, and that taxes and
government spending are both zero. Furthermore, the current account and net factor payments
from abroad are both zero.
What is GDP? What is GNP? Explain your answers
3. Suppose at time t=1, government deficit is zero, that GDP1 = 1000, that consumption C1=700
and investment I1 = 500 and that the country’s foreign debt D1 =0
a.
derive the value of national savings S1, net exports NX1 and current account CA1 (show
all your work)
Savings =
Net Exports =
Current Account =
b.
What is the value of the capital account KA1?
Following from the scenario above, suppose that at time t=1, the current account deficit is financed
by borrowing abroad at 10% interest rate. Suppose at time t=2, the government deficit =0, GDP2
=1000, C2 =700 and I2 = 500.
a.
What is GNP2?
b.
Derive the value of debt D2, Savings S2, net exports NX2 and current account CA2
Debt =
Savings=
Net exports =
Current Account =