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1.     For each of the following changes, other things equal, has the value of the country’s...

1.     For each of the following changes, other things equal, has the value of the country’s current account balance increased (become more positive or less negative), decreased, or stayed the same? Briefly justify your answer.

a.     Total trade rises but net exports remain the same. Exports of goods and services increase by $10 billion and imports of goods and services increase by $10 billion

b.     The price of oil falls from $100/barrel in 2014 to $50/barrel in 2015 for a country whose oil export volume (# of barrels) remains the same. Oil was 95% of this country’s exports in 2014.

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Answer #1

(a) Current account is the sume of net exports , net income from abroad and net unilateral transfers .

And when exports rises by $10 billion and imports rises by $10 billion. This implies net exports remains the same. Therefore, current account balance remains the same.

(b) Net exports include the value and not the volume of oil exports. When value of oil exports drops from $100/ barrel to $50/ barrel i.e drops by half . Because of price decline , current account would also fall by the decrease in the value of oil exports.

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