Question

Consider a situation where Turkey has a current account deficit.

1. What can you conclude about Turkey's levels of domestic savings, domestic investment, international capital flows, and their capital account?
2. Assuming that Turkey has a floating exchange rate and perfect capital mobility, how would a decrease in the level of Kuwaiti savings impact their balance of payments?

Answer 1

There is  a situation where Turkey has a current account deficit.

a]

• current account is the account which represents the balance within one year whereas capital account is the account which refers the asset and liability status of the country.

therefore, current account deficit donot effect the capital account but if the capital account have surplus balance then it can balance the current account deficit by capital account surplus.

• domestic saving if less than investment then it can be concluded that more of saving is used in buying goods and services from the foreign countries and because of more imports there is current account deficit.
• as there is current account deficit , then it can be concluded that international inflows are actually more as there will be more inflows in terms of import than the export thus creating deficit balance of current account.
• domestic investment is more as there is current account deficit which means most of saving is used in importing or no portfolio investment is done as yearly receipts of return from investment will balance the current account.

Answer b]

-if there is decrease in the level of Kuwaiti savings then it can be said that more of imports is done in buying goods and services from the foreign countries thus increasing the gap of import and export thus creating the balance of current account deficit.

current account is deficit means that there is chances of deficit balance of payment, which means balance of payment is negative.