Self-Check Questions


If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?


If the trade deficit of the United States increases, how is the current account balance affected?


State whether each of the following events involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy:

  1. Mexico imports services from Japan.
  2. Mexico exports goods to Canada.
  3. U.S. investors receive a return from past financial investments in Mexico.

In what way does comparing a country’s exports to GDP reflect how globalized it is?


Canada’s GDP is $1,800 billion and its exports are $542 billion. What is Canada’s export ratio?


The GDP for the United States is $16,800 billion and its current account balance is –$400 billion. What percent of GDP is the current account balance?


Why does the trade balance and the current account balance track so closely together over time?


State whether each of the following events involves a financial flow to the U.S. economy or away from the U.S. economy:

  1. Export sales to Germany
  2. Returns being paid on past U.S. financial investments in Brazil
  3. Foreign aid from the U.S. government to Egypt
  4. Imported oil from the Russian Federation
  5. Japanese investors buying U.S. real estate

How does the bottom portion of Figure 9.3, showing the international flow of investments and capital, differ from the upper portion?


Explain the relationship between a current account deficit or surplus and the flow of funds.


Using the national savings and investment identity, explain how each of the following changes (ceteris paribus) will increase or decrease the trade balance:

  1. A lower domestic savings rate
  2. The government changes from running a budget surplus to running a budget deficit
  3. The rate of domestic investment surges

If a country is running a government budget surplus, why is (T – G) on the left side of the saving-investment identity?


What determines the size of a country’s trade deficit?


If domestic investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?


Why does a recession cause a trade deficit to increase?


Both the United States and global economies are booming. Will U.S. imports and/or exports increase?


For each of the following, indicate which type of government spending would justify a budget deficit and which would not:

  1. Increased federal spending on Medicare
  2. Increased spending on education
  3. Increased spending on the space program
  4. Increased spending on airports and air traffic control

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.


Describe a scenario in which a trade surplus benefits an economy and one in which a trade surplus is occurring in an economy that performs poorly. What key factor or factors are making the difference in the outcome that results from a trade surplus?


The United States exports 14 percent of GDP while Germany exports about 50 percent of its GDP. Explain what that means.


Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.

  1. Living in an especially large country
  2. Having a domestic investment rate much higher than the domestic savings rate
  3. Having many other large economies geographically nearby
  4. Having an especially large budget deficit
  5. Having countries with a tradition of strong protectionist legislation shutting out imports