Question 8 - Suppose that, in a given year, U.S. foreign trade consists of some consumer importing a single Toyota Camry for $20,000 (2.3 million yen). Here are some possible financial transactions to accompany the purchase: (i) The consumer pays with $20,000, which Toyota puts in its American bank account. (ii) The consumer pays with 2.3 million yen that happens to be in a Japanese bank account. (iii) The consumer pays with 20,000; Toyota invests the proceeds in U.S. Treasury bills. (iv) The consumer purchases 2.3 million yen on the foreign exchange market from some anonymous American foreign exchange trader and then pays for the car.
A. Is the United States running a current account surplus or deficit?
Current account deficit
B. For each of the financial transactions just described, explain the effect the transaction has on the U.S. financial account. What is the sum of the current account and financial account balances?
Question 9 - Net Domestic product is considered to be a better measure of welfare than GDP, since it adjusts for the fact that part of GDP must be devoted to replacing physical capital worn out during the course of the year. If we took this principle of adjusting for depreciation more seriously, what other expenditures would you want to deduct from GDP to get a clearer measure of net national product?