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Trade Deficit in National and International Economies

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National and International Economies

1. Which sector (household, business, or international) spends the most? Which sector spends the least? Which sector spends the least? Which sector, because of volatility, has importance greater than is warranted by its size?

2. Why does the value of output always equal the income received by the resources that produced the output?

3. People sometimes argue that imports should be limited by government policy. Suppose a government quota on the quantity on imports causes net exports to rise. Using the circular flow diagram as a guide, explain why total expenditures and national output may rise after the quota is imposed. Who is likely to benefit from the quota? Who will be hurt?

4. Suppose there are three countries in the world. Country A exports $11 million worth of goods to country B and $5 million worth of goods to country C; country B exports $3 million worth of goods to country A and $6 million worth of goods to country C; and country C exports $4 million worth of goods to country A and $1 million worth of goods to country B.

a. What are the net exports of countries A, B, and C?

b. Which country is running a trade deficit? A trade surplus?

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Solution Preview

1. Which sector (household, business, or international) spends the most? Which sector spends the least? Which sector spends the least? Which sector, because of volatility, has importance greater than is warranted by its size?

I will answer this question assuming we are talking about the US economy. In the US economy the HOUSEHOLD sector spends the most, about 65-70% of our GDP. The smallest contributor is REST OF THE WORLD. Our net exports amounts to less than 5% of our GDP and our total trade amounts to about 25% of our GDP which is very small by world standards. In case of many economies total trade exceeds their GDP. The sector that carries greater weight than warranted by its size is FIRMS. Investment fluctuations are the primary cause of business cycles. For example in the current business cycle investment in the US has fallen by more than 25% from its 2007 levels. For the data see ...

Solution Summary

National and International Economies are described.

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Large scale economic issues

Your hometown newspaper needs someone to write an informative article on large scale economic issues. The reporter who spoke with you before thinks of you, welcomes you home, and requests another article. Attached is a summary of disaggregated data drawn from information provided on the 2000 U.S. balance of payments which is in the 2002 federal document, Economic Report of the President, available on the web.

In addition to the balance of payments data presented above, the Bureau of Economic Analysis' document entitled, International Investment Position of the United States (http://www.bea.gov/bea/newsrel/intinvnewsrelease.htm) offers the following information.

"At year-end 2002, the value of foreign investments in the United States exceeded the value of U.S. investments abroad by $2,387.2 billion (preliminary) with direct investment valued at current cost. At year-end 2001, foreign investments in the United States exceeded U.S. investments abroad by $1,979.9 billion (revised)."

Assess the United States's current account deficit. The reporter will edit your material down to a usable length but asked for plenty of material with which to start. She requests that you answer the following questions:

What has caused the U.S. run a merchandise trade deficit year after year since the early 1980s?
Is the current account a deficit problem? Explain.
Is the trend of the international investment position of the U.S. problematic? Why or why not?
How is the current account related to a country's business cycle?
What is the relationship between a country's net financial inflow and its current account?
How does the U.S make adjustments for the balance of payment issues?

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