irrelevant Th4.1: Significance of Global Trade Imbalances

Question 1

Some argue that a current account imbalance is not much of a problem so long as…

Answer 1

the capital and financial account is in surplus

Question 2

How did the financial crisis of 2008 affect capital?

Answer 2

dramatically reduced the amount of capital flowing around the global economy and showed how quickly the position of the capital account can change

Question 3

Concerns about global imbalances can be measured in two ways…

Answer 3

imbalances on the current account and imbalances in assets owned abroad or borrowing owned abroad

Question 4

How are these two measurements linked? How could this become an issue?

Answer 4

since if a country has a constant surplus, then it will tend to build up a stock of assets abroad whilst if they have a constant deficit, they will owe more and more to foreign creditors - may become an issue if imbalances are large

Question 5

How can foreign investors cause problems?

Answer 5

if they refuse to lend to a ‘country’ - but it is in individual or institution which takes the loan and not the country. if they refuse to lend to a bank or government this will be far more impactful than a firm or individual

Question 6

Today, deficits are…

Answer 6

less of a concern to countries

Question 7

When do current account imbalances become a problem?

Answer 7

when governments can’t repay their foreign currency debts

Question 8

What is the reality of deficits and surpluses?

Answer 8

countries with large deficits are seen as a problem, whilst those with a surplus are seen as successful, yet in reality they can be just as unstable

Question 9

How do current account surpluses cause losses?

Answer 9

cause losses for citizens in a country who don’t see the high living standards which they could enjoy from consuming more