Chapter 3 Flashcards
Why is national consumption (domestic spending) a better measure of national welfare?
Domestic spending measures the amount of goods and services consumed, rather than produced as in GDP.
What is domestic spending using the national income identity terms
C +I + G
When a country has a current account surplus, what must be true of the relationship between GNP and DS (Domestic Spending)
GNP must exceed domestic spending by the equivalent amount of the CA surplus. This is true because of the identity:
(EX - IM) = GNP + DS
What are possible scenarios that explain trade deficits? (bad, benign, good)
- signal excessive borrowing that can lead to possible default or a reduction in living standards over time
- signal drawing money from previously accumulated savings
- signal domestic investment that spurs economic growth in the future
What are possible scenarios that explain trade surpluses? (bad, benign, good)
- excessive saving where GNP fails to rise ahead of consumption can lead to a decline in living standards
- represent a period of repaying past debt
- represent prudent saving and asset accumulation which can support the economy in the future
The value of domestic spending (in trillions of $) if the current account has a deficit of $600 billion and GNP is $4800 billion.
5.4
Suppose the hypothetical country of Avalon has a current account deficit of $100 billion this year. Based on this one fact, which situation would make this deficit more worrisome to an economic analyst?
Avalon’s GNP is $500 billion OR
Avalon’s GNP is $5,000 billion
Avalon’s GNP is $500 billion
