Econ2102 Assignment 2 - Econ2102 Assignment 2 Question 1(i...

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Econ2102 Assignment 2 Question 1 (i) As we can see from the graph above, the ratio of Trade balance to GDP reaches a peak at 1981 which is 3% and decreases dramatically down to a bottom at 1988 to 1989, after that it remain negatively fluctuating until 2006 reaches the bottom -4%. The higher the ratio, we say the lower consumption is in the economy in that period derived from the equation of : NX=Y-C (ii) Correlation coefficient Period -0.3507 t -0.5310 t+1 -0.35 t-1 -0.55 t+2 0.51 t-2 (iii) The correlation coefficient is descriptive. It measures the co-variation in the magnitudes of two things. In this data the absolute values are relatively high, but most of them are negatively correlated. From the data we can say that the future GDP growth is more likely having a strong correlation with the trade balance. (iv) An open economy can engage in inter-temporal trade. Permanent income shocks for example the level of income is higher than any future periods which will lead to a comparable adjustment in consumption which implies a negligible movement in the current account; If the shock is transient, this theory first states that if output increase in period one, the economy in period one would run a trade balance surplus in response to the transitory increase in income. This seems to correspond with the result because Z3283987 Tianyi Ai Econ2102
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correlations between TB/y and dy in time t is positive (0.2674). However consider the
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