Question

Country A has 100b$ trade deficit against Country B, and Country B has 200b$ trade surplus against Country C, and Country C has 150b$ trade surplus against Country A. Moreover, assume that Country B has a balanced trade with other countries (countries other than A and C), but Country A has 100b$ trade surplus against other countries (countries other than B and C) and Country C has 100b$ trade deficit against other countries (countries other than A and B). Then, Country B closed its border permanently due to the outbreak of corona virus and thus excluded from world financial and trade markets permanently. What happens to real world interest rate? How does this affect the real exchange rate and nominal exchange rate between Country A and Country C in long run? Assume that Country B is sufficiently large so it has a significant effect on world savings and investments, and further assume that the virus only affects Country B. Explain in detail by showing the changes in the relevant markets.

Answer 1

Country A has 100b$ trade deficit against Country B, and Country B has 200b$ trade surplus against Country C, and Country C has 150b$ trade surplus against Country A. Moreover, assume that Country B has a balanced trade with other countries (countries other than A and C), but Country A has 100b$ trade surplus against other countries (countries other than B and C) and Country C has 100b$ trade deficit against other countries (countries other than A and B). Then, Country B closed its border permanently due to the outbreak of corona virus and thus excluded from world financial and trade markets permanently. What happens to real world interest rate? How does this affect the real exchange rate and nominal exchange rate between Country A and Country C in long run? Assume that Country B is sufficiently large so it has a significant effect on world savings and investments, and further assume that the virus only affects Country B. Explain in detail by showing the changes in the relevant markets.

Answer: as A 100 dollar trade deficit it's means that it is impoting good from B and paying county B for importing

B 200$ trade surplus means that B export good from C and have trade surplus

C also have trade surplus of 150$ that it is exporting good and earning that's why surplus from A

On the other hand B have Balance BOP with others

A 100 trade surplus with others countries means exporting goods and earning from other countries

C 100$ deficit with others means importing goods and paying for that

Now if due to corona virus B closed its border than it will affect all because in many situation each countries importing and exporting from each other. Due to virus world interest rate will shrink. In real and nominal terms if we considered online country Aand C than we can see that as country suffering from trade deficit that is 100$ this will recover in long term because country will not able to important and that's why country's deficit will improve on the other hand A also exporting goods which is generating 100$ surplus country will not able to earn that amoi by exporting goods and services so in long terms real exchange rate will decrease. If virus only affect country B than country B will not able to earn 200$ and it's nominal exchange rate decreases

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