Problem Set 1 Answers Econ 3104

Problem Set 1 Answers Econ 3104

1. International Trade and International Finance (or, International Macroeconomics):

Thought the two are closely related, the focus and typical models/assumptions differ between the two. International trade is concerned with why, what, and how much countries trade as well as the benefits and losses associated with international trade, and how they vary across individuals in an economy. International finance is focused on how macroeconomic variables such as total output, unemployment, and the price level are determined and change over time in an open economy as well as how international variables such as the exchange rate, trade flows, and foreign borrowing and lending affect and are affected by the domestic economy.

2. 𝑌=𝐶+𝐼+𝐺

3. 𝑌=𝐶+𝐼+𝐺+𝐸𝑋−𝐼𝑀=𝐶+𝐼+𝐺+𝐶𝐴

4. In a closed economy, savings much equal investment (𝑆 = 𝐼), since national income must equal national expenditure on private consumption, government consumption, and investment. In an open economy, saving is equal to investments plus the current account balance (𝑆 = 𝐼 + 𝐶𝐴). Since the residents of an open economy are not required to consume or invest only the output of their country, they have an expanded set of options for saving (or dis-saving) by lending or borrowing in international markets. Thus, the current account balance does not have to equal zero, and investment can be greater or less than national saving.

5.



6. The figure shows the relationship between the current account and net foreign asset position of a country. This figure, in particular, is the U.S. current account and net foreign wealth from 1977 until 1996. It demonstrates how a country’s net foreign wealth