V.I.C. - assets purchased today . Thus, if positive shocks...

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V.I. C. Cyclical Behavior of the Trade Balance 1. Business Cycle Shocks and the Trade Balance We have seen that most business cycles are due to real shocks—changes in A . An increase in A does two things that affects the rate of return on assets purchased today. (i) increases the MPK now and into the future (if the shock is persistent), which raises the return you can expect on assets purchased today. Let’s call this the MPK effect . (ii) increases current production, real income, and saving (especially when the shock is viewed as temporary). Let’s call this the saving effect . These two effects have opposing effects on the return to assets purchased today. (i) MPK effect raises the return on assets purchase today, but only if the shock is persistent ( A is higher next year as well) (ii) saving effect increases saving, especially when the shock is viewed as temporary , which increases k next period and lowers the return on
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Unformatted text preview: assets purchased today . Thus, if positive shocks are viewed as largely (i) persistent or permanent , then the MPK effect dominates , expected returns rise, and a trade/current account deficit results. (ii) temporary , then the saving effect dominates , expected returns fall, and a trade/current account surplus results. The actual trade/current account balance is countercyclical. Figure 17.6 2. Other Events Causing Trade deficits (i) Harvest Failures => saving effect clearly dominates => drop in saving (people try to borrow to maintain consumption) => low k => high returns on assets (ii) Wars => temporary increase in taxation and borrowing by government => drop in national saving => low k => high returns on assets (iii) Positive Conditions for Long-term Growth => high MPK now and into the future => high returns on assets purchased today...
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V.I.C. - assets purchased today . Thus, if positive shocks...

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