182_midterm_review_rev - Econ 182 Spring 2008 Mid-term...

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Econ 182, Spring 2008 Mid-term Review Oleksa Shvets & Congyan Tan Practice problems Chapter 12 Problem 1 Q : We stated in this chapter that GNP accounts avoid double counting by including only the value o¢ nal goods and services sold on the market Should the measure of imports used in the GNP accounts therefore be de°ned to include only imports of °nal goods and services from abroad? What about exports? A : The reason for including only the value of °nal goods and services in GNP, as stated in the question, is to avoid the problem of double counting. Double counting will not occur if intermediate imports are subtracted and intermediate exported goods are added to GNP accounts. Consider the sale of U.S. steel to Toyota and to General Motors. The steel sold to General Motors should not be included in GNP since the value of that steel is subsumed in the cars produced in the United States. The value of the steel sold to Toyota will not enter the national income accounts in a more °nished state since the value of the Toyota goes towards Japanese GNP. The value of the steel should be subtracted from GNP in Japan since U.S. factors of production receive payment for it. Problem 6 Q : Can you think: of reasons why a government might be concerned about a large current account de°cit or surplus? Why might a government be concerned about its o¢ cial settle- ments balance (that is, its balance of payments)? A : A current account de°cit or surplus is a situation which may be unsustainable in the long run. There are instances in which a de°cit may be warranted, for example to borrow today to improve productive capacity in order to have a higher national income tomorrow. But for any period of current account de°cit there must be a corresponding period in which spending falls short of income (i.e. a current account surplus) in order to pay the debts incurred to foreigners. In the absence of unusual investment opportunities, the best path for an economy may be one in which consumption, relative to income, is smoothed out over time. Problem 8 Q : Is it possible for a country to have a current account de°cit at the same time it has a surplus in its balance of payments? Explain your answer, using hypothetical °gures for the current and nonreserve °nancial accounts. Be sure to discuss the possible implications for o¢ cial international reserve ±ows. A : A country could have a current account de°cit and a balance of payments surplus at the same time if the °nancial and capital account surpluses exceeded the current account de°cit. Recall that the balance of payments surplus equals the current account surplus plus the °nancial account surplus plus the capital account surplus. If, for example, there is a current account de°cit of $100 million, but there are large capital in±ows and the capital account surplus is $102 million, then there will be a $2 million balance of payments surplus.
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