During the 1990s, private household debt in the United States has been growing at a faster rate than US economic output, while the ratio of household debt to equity rose from 84% to 105% between 1990 and 2000. At the same time, government deficits prevailed except for a short period in the late 1990s. Do you think raising tariffs would have reduced the value of US net imports? Would tariffs have reduced the volume of net imports?

1 Finance and Trade Perspectives on the Current Account
Current account imbalances can be interpreted with a perspective on commodity trade or on
financial transactions. For our purposes,

CA

EX

IM
. Using the result that

S

S
P
+
S

G

I
+
CA
, show that

CA

S
P

I
+ (
T

G
) is also true.

Since 2003, Singapore is running both a fiscal surplus (
T > G
) and a current account
surplus. Use suitable interpretations of the current account to explain how one could
give rise to the other. Converting Singapore’s fiscal surplus into USD, infer the difference
between private savings and investment in Singapore for 2003, 2004 and 2005.

Ireland exhibits considerable smaller GNI (Gross National Income) than GDP. Infer the
difference in Euros for the years 1999 through 2004. Which of the two series grows faster?
What explains this difference? Can you infer whether foreigners or domestic residents
raised their income faster?

During the 1990s, private household debt in the United States has been growing at a faster
rate than US economic output, while the ratio of household debt to equity rose from 84%
to 105% between 1990 and 2000. At the same time, government deficits prevailed except
for a short period in the late 1990s. Do you think raising tariffs would have reduced the
value of US net imports? Would tariffs have reduced the volume of net imports?
Data
. Visit http://data.imf.org/ifs and obtain the current account and fiscal surplus for
Singapore in 2003, 2004 and 2005. Clicking on the “Query” tab allows you to view these variables
by adjusting the columns and rows parameters. Adjust the columns “time” parameter to only
show years 2003 to 2005. Adjust the rows “country” parameter to only show Singapore. Lastly,
adjust the rows “indicator” parameter to include “Balance of Payments, Current Account,
Goods and Services, Net” and “Fiscal, Budgetary Central Government Cash Surplus/Deficit”.
Repeat similar steps for Irish data.
2 An
N
-Country World
Think of a world with
N
countries, each with its own currency. How many bilateral exchange
rates are there? (You may try working your way up from
n
= 1
,
2
, …
to

n

N
.) How many
current accounts can clear independently? So, how many independent exchange rates can there
be?
In this light, how would you characterize the dollar under the Bretton Woods system? Does
this characterization help explain the external balance problem of the United States and the
Triffin Dilemma? Why or why not?
3 Spread of the Great Depression
About a third of all US banks failed during the onset of the Great Depression between 1929 and
1933, wiping out around a quarter of the US money in circulation (M1). Most major economies
1

Hshieh
EF4331 Homework
were back on a gold standard by that time. If the central banks in those countries adhered
to the rules of the game, how would the monetary contraction in one country spread to other
countries? If central banks did not adhere to the rules of the game, what would be the current
account response under the price-specie flow mechanism?

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