Explain the relationship between current Account and the goods market.

Solutions

Expert Solution

Current account basically measures the trade balance, which is the difference between exports and imports. Therefore current account balance measures net exports and net exports is an important component of aggregate demand in the goods market

The goods market equilibrium is influenced by net exports in the sense that any increase in the net exports is going to increase the aggregate demand. This will shift the aggregate demand curve to the right and both the real GDP and the price level will increase in the short run.

Also note that changes in the goods market equilibrium also influence current account. For example an increase in the price level as resultant from a new goods market equilibrium, is going to make domestic goods expensive for foreigners. This decreases the demand for domestic currency and depreciates it. As a result it exports are increased and imports are reduced so that net exports is increased.

Rahul Sunny answered 1 year ago

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