1. An economy that starts with a positive net international investment
position will run a trade balance deficit at some point.
2. A country has been having trade balance deficits for 45 years. Four
decades ago, the country was a net creditor, but after so many trade
deficits it became a debtor. Clearly, this economy will have to run
trade surpluses at some point.
3. A two-period economy runs trade surpluses in both periods. It follows
that the current account in period 1 can have either sign (depending
on the magnitude of TB1), but the current account in period 2 must
be positive.
4. When the world interest rate is negative a two-period economy can
run perpetual trade deficits even if its initial net foreign asset position
is negative.
5. When the world interest rate is negative a two-period economy cannot
run perpetual current account deficits if its initial net foreign asset
position is negative.
6. A country starts 2017 as a net creditor. The interest rate on its net
asset position is 10 percent. That year, it runs a current account
deficit. It follows that the trade balance in 2017 was also negative.
7. The fact that over the past quarter century the United States has
run larger and larger current account deficits is proof that American
household savings have been shrinking.
8. A policy of balanced trade (i.e., the requirement that the trade balance
must be zero at all times) is only feasible if there is free capital mobility.
Can a three-period economy run a perpetual trade balance deficit?
Can a three-period economy run a perpetual trade balance deficit? Can it
run a perpetual current account deficit? To address these questions, derive
step by step adaptations of equations (2.4) and (2.5) to a three-period
horizon.
In a two-period economy, saving in periods 1 and 2 is 5 (S1 = S2 = 5) and
investment in both periods is 10 (I1 = I2 = 10).
1. What is the current account in periods 1 and 2 (CA1 and CA20?
2. What is the initial net international investment position (B0)?
3. Assuming that the interest rate is 4 percent (r = 0.04), what is the
trade balance in periods 1 and 2 (TB1 and TB2)?
