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Germany's current account surplus

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In 1990, Germany's current account surplus exceeded $50 billion. However, it is estimated that the reunification process will require that Germany invest several hundred billion dollars in its eastern states over the coming decade.

a. What implications does this huge investment have for Germany's current account balance in the future? Explain.

b. How should the Deutsche mark's value change to facilitate the necessary shift in Germany's economy?

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This posting gives a detailed solution to the student's question. How should the Deutsche mark's value change to facilitate the necessary shift in Germany's economy is determined.

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a. What implications does this huge investment have for Germany's current account balance in the future? Explain.

ANSWER. Unless German savings rise in line with the increase in German domestic investment, balance-of-payment arithmetic tells us that Germany's current-account surplus must fall. If domestic ...

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