Tutorial 1 2019.pdf - Tutorial 1 Q1 “If a country imports more goods and services than it exports the difference can be financed by some domestic

Tutorial 1 2019.pdf - Tutorial 1 Q1 “If a country imports...

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1 Tutorial 1 Q1. “If a country imports more goods and services than it exports, the difference can be financed by some domestic residents willing to sell their assets to someone else in the domestic economy. Hence there is no need to run a financial account surplus to finance the current account deficit.” What is wrong with this way of thinking? Q2. As mentioned in the lecture, for GNE in a given year in a closed economy to be equal to GDP in that year, it must be true that (a) GNE includes only that year’s output, i.e. previous years’ output must be excluded, and (b) GNE includes all of that year’s output. Violation of (a) would imply GNE > GDP, while GNE < GDP if (b) is not true. The textbook mentions that GNE = GDP in a closed economy without any explanation. Please argue that this is always true. Hint: The “I” in GNE should capture (in a broad sense) capital goods purchased by firms, let’s call this part “fixed investment”, and change in the stock of inventory (i.e. inventory investment).
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