Economics Questions
1. What is meant by “twin deficits”? Use this relationship between GNE and GNDI to explain your answer
Twin deficits take into account a circumstance where an economy is facing both a fiscal deficit as well as a deficit on the current account for the nation’s balance of payments. Therefore, the nation is facing both trade deficits and government budget deficits. This can elucidate the relationship between national income (GNDI) and the national expense (GNE). Notably,
GNDI = GNE + CA (current account)
GNDI > GNE if and only if CA > 0 and this is indicative of a surplus in the current account
GNDI < GNE if and only if CA < 0 and this is indicative of a deficit in the current account
2. Give an intuitive explanation that captures the relationship between the current account position (surplus or deficit) and role of the country as a net borrower or lender. How may this relationship generate wealth effects altering the later Current Account?
A surplus in the current account is a positive variance between the savings and investment of a nation. Such a surplus is indicative of a country being a net lender to the entire world. On the other hand, a deficit in the current account is a negative variance between the savings...
References
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Cline, W. R. (2010). Financial globalization, economic growth, and the crisis of 2007-2009. Peterson Institute.
Investopedia. (n.d.). Current Account. Retrieved from: https://www.investopedia.com/terms/c/currentaccount.asp
Investopedia. (n.d.). J-Curve Effect. Retrieved from: https://www.investopedia.com/terms/j/j-curve-effect.asp
Yeyati, E. L., & Williams, T. (2014). Financial globalization in emerging economies: Much ado about nothing?. economía, 14(2), 91-131.
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