Problem Set 6-2




1. Consider the following situations describing the actions of an individual household. Explain whether each situation is analogous to a country running a trade deficit, a trade surplus or neither. Also, be sure to explain why.

A. A student takes out a bank loan to finance a spring break vacation.

B. A family sells an antique watch to finance a purchase of 100 shares of a "hot" stock.

C. A retired couple cashes in a portion of their savings to finance their daily living expenses.

D. A carpenter builds a deck for a dentist in exchange for dental checkups for his kids.

E. A family pays off the last $3000 of their student loans.

2. Consider the following statements concerning current account balances. Explain in what sense, if any, the statements are valid? In what sense, if any, are the statements misguided?

A. a current account deficit implies that our nation is giving away money to the rest of the world.

B. a current account deficit indicates that a country has exported jobs to the rest of the world.

C. a current account deficit implies that the nation must have a reduced standard of living in the future.

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Last Updated on 4/23/00