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Current Account

In: Business and Management

Submitted By safmeeer
Words 525
Pages 3
Q1: Define the current account balance fully and explain what it is made up. Specifically, you should show the relationship between the current account and the trade account.

A: Current account balance is the difference between a country’s savings (imports) and investments (exports). If it is positive, the country had enough funds to invest abroad; however, if it is negative the domestic investments of the company were financed by foreign investors.

Whereas trade account It is defined as the sum of the balance of goods and services exported, net income from abroad, minus the sum of goods and services imported which is included in the current account

Current Account = Changes in net foreign assets

Q2: What is the sovereign debt and which countries within the EZ are suffering from it?

A: Sovereign debt is bonds, securities, or bills issued by a national government (in domestic or foreign currency) to finance the country’s growth.

Theoretically sovereign doubts are considered to be low on risks, since the government has different measures to guarantee returns, e.g. increased taxes or print money. Though practically, a number of governments in the past could not repay their debt , and defaulted. The riskier, the investment, the higher the returns.

Countries within the EZ suffering from sovereign debt are:

1) Greece

2) Ireland

3) Italy

4) Portugal

5) Spain

Q3: What is the external imbalance refer to, why is it an issue in EZ/ And how it is related to the saving, investment relationship as discussed in the open economy chapters of the textbook?

A: An imbalance is said to have occurred in the economy, if the current account balance is too large, i.e. the net exports is not equal to net imports.

If it is too large in positive, the country has large hoards of currency (foreign or national),…...

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