ECOS3029 Tutorial Exercises: Week 2
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ECOS3029 Tutorial Exercises: Week 2
Q1. Mathematical Appendix
1. Look at the equation at the top of Page 28 of Chapter 2 of the Terra textbook.
Write an equation for the term Bt+3 that is similar to the equation for Bt+2 beneath equation (2.16) on Page 27; the equation should involve period t+3 National
Accounts variables and Bt+4 . Substitute this equation into the equation at the top of Page 28, and rearrange to get a tidy expression for -(1+i*)Bt.
2. Suppose that a country continuously runs a current account deficit of 100 each year and a capital account of 0 so that its Net International Investment Position gets lower by 100 each year. If the international interest rate is positive, is this current account balance potentially sustainable?
Q2. Constant Debt to GDP
Suppose an economy’s GDP (Y) is growing at rate g and always has a capital account of zero.
If the economy current has a Net International Investment Position of Bt, what Current
Account balance would keep the ratio of Net International Investment Position to GDP
constant? Does this have any implications for fast‐growing (or slow‐growing) economies?
Q3. CA Sustainability
The chart below that presents data for an actual country from 2002 to 2019. The four data series are: current account balance as a % of GDP (“CA”); investment as a % of GDP (“I”); productivity measured as real GDP (in thousands of ‘real’ USD) divided by total employment in the economy (“Productivity”); and debt service (interest and principal repayments) as a % of total export revenue (“Debt Service”). The country also maintains an exchange rate that is fixed in terms of USD.
Discuss the risks of this country experiencing a “sudden stop” in capital inflows, and what would the likely consequences be if it experienced such a stop. Are there any signs that the current account of this country is sustainable and that it might avoid a sudden stop?
2023-09-15