7 World Market in Goods and Credits

  • Texbook: Chapter 17, Macroeconomics: A Modern Approach, Robert J. Barro, Cengage Learning, 2008.

  • There are two videos to watch: video 1, video 2

7.1 Net international investment position.

Net international investment position measures the net increase of home country’s holding of foreign assets, denoted as \(\Delta B^{f}\). For the following question, please point out how it would affect a country’s net international investment position.

  1. HTC issues new bonds in New York city.

  2. Taiwan importers import goods and pay in US dollars.

  3. Taiwan exporters export goods and obtain US dollar revenues.

7.2 Remittance.

The vocabulary definition of the Current Account Balance is defined as the national total net income from all sources minus its total net expediture. Here net refers to the inflow to home country minus the outflow to foreign countries. Remittance means a nation’s citizen working overseas wires money back to his home country. Some countries, such as India, can receive remittances amounted to more than 70 billion dollars a year. How do you modifiy our CA formula to accommodate remittance?

7.3 Different rates of return between home and foreign assets

The term \(iB^{f}\) refers to income generated by net international investment position which by definition is the home country’s claim on foreign assets minus foreign countries’ claim on home assets.

  1. If home assets bear an interest rate i different from foreign assets (say, \(i^{*}\)), then how would you modify the \(iB^{f}\) term.

  2. Can a country hold a positive \(B^{f}\) but receives negative asset income from it? On the other hand, can a country hold a negative \(B^{f}\) but receive positive asset income from it?

7.4 Central Bank.

So far in our class, there is no central bank. However, with the presence of \(B^{f}\) it contains various foreign assets including foreign currency. Sometimes, its buying and selling requires currency exchange, which may involve central banks. A central bank has to hold enough amount of foreign currency for commercial banks to convert money. These holdings are defined as the central bank’s internatinonal reserve position. Let \(S\) be the central bank’s international reserve position and \(\Delta S\) be its change.

  1. If we sum all the household budget contraints of the residents in home country, what would that aggregate household budget constraint look like?

  2. What is the relationship between CA, \(\Delta B^{f}\) and \(\Delta S\)? (In the jargons of the balance of international payments, \(-\Delta B^{f}\) is called the Financial Account balance.)

  3. Suppose Bank of Taiwan owns the amount of Eurobond that is worth 45m NTD by the end of last year. Bank of Taiwan decides to unload the entire 45m NTD Eurobond this year by converting it back to 45m NTD with the central bank. What would happen to \(\Delta B^{f}\)? What about the central bank’s reserve asset?

7.5 Country Report

Choose a country to investigate its current account balance fluctuations (all numbers in your analysis should be a ratio relative to its GDP).

  1. How does its trade balance contribute to it? How about the contribution of asset income from net international investment positions?

  2. In terms of national saving and investment, does the fluctuations of CA mainly reflect the fluctuations of national saving or national investment?

7.6 Improvement of the term of trade

Analyze the impact on the CA balance if the improvement on home country’s term of trade is permanent.

7.7 CA scenarios

What would happen to the CA balance for the following situations:

  1. Home citizens are pessimistic about its future economy.

  2. Temporary harvest failure for an agricultural home country.

7.8 Taxes and the CA balance.

Discuss the effects on a country’s CA balance from the following changes in tax rates.

  1. A permanent increase in the tax rate on labor income, \(\tau_{L}\).

  2. A temporary increase in the tax rate on labor income, \(\tau_{L}\).

  3. A permanent increase in the tax rate on asset income, \(\tau_{a}\).

  4. A temporary increase in the tax rate on consumption, \(\tau_{c}\).

7.9 Twin deficits.

Sometimes people concern if government budget deficit is a reason for current account deficit. That is whether this two deficits usually appear hand-in-hand. There are several reasons that a budget deficit can happen. Please discuss its impact on government budget deficit (i.e. \(\Delta B^{g}\)) and the CA balance.

  1. Government reduces its lump-sum tax.

  2. Government increases its purchase temporarily.

  3. A temporary economic downturn that increases government transfer payment.

7.10 Balance of Payment Account(國際收支表)



經常帳:Current account

資本帳:Capital account

  • 資本移轉及非生產性、非金融性資產交易(專利權、商譽等無形資產)的取得與處分。

金融帳:Financial account

  • 金融帳可分為直接投資,證券投資及其他投資(如貿易信用,存款等借貸)。直接投資是指國外資金直接對本國企業作所有權的投資。而證券投資則是指國外資金投入於本國的資本市場,其中又可分為股權證券投資及債權證券投資。

7.11 Economist magazine

“Surplus war. Germany’s current-account surplus is a problem”, Feb 11th, 2017.

  1. Why does the article say:

“The best way out of today’s imbalances, economists say, is not to keep cutting wages in down-and-out countries like Greece, but to let them rise in Germany. Wages have been going up—by 2.3% last year—but should grow faster”?

  1. Too much current-account surplus can mean too much saving. What are the reasons contributing to Germany’s excess saving?

  2. What are the suggestions to tackle this excess surplus problem? Do you think it is a problem?