Question

1) In the context of the National savings and investment identity, briefly describe the main source for both the supply of and demand for capital in the U.S. economy.

2) Briefly explain how short-term movements in the business cycle affect the trade balance.

Answer 1

1) According to national saving and investment identity in any economy the qunatity of financial capital supplied should be equal to quantity of financial capital demanded.

Any country the national savings are savings of individuals, households, companies and government. If the economy is in defecit it means the supply is more and the demand is less. If the economy is in surplus the demand is more and supply is less.

During defecit the foreign investment is more in the supply.

The main capital of US economy is the savings of individuals, firms and government along with the inflow of capital by investors .

In US the investment is more and sources of income from investment and savings is less when compared to its economy that is coming from foriegn markets as the products and goods from US have great demand all over the world which creates economy to that country in form of taxes.

In US supply is more in recent times when compared to demand. There is always economic defecit but the economy is always stable due to large market all over the world.

US is the developed and the leading business hub in any world this is one of the leading country and the super power in the world. During 1970 and 80's there are crisis in US which effected the world economy. Thus US economy should be stable always for better performance of world as if it is in crisis the whole world will get affected.

2) The important stages in a business cycle are Recession, recovery, growth and decline.

In a short run trade imbalances are common whether the economy may be in recession or growth.A recession always make trade defecit smaller or trade surplus larger.

During short term growth there will be huge growth in economy which lead to trade defecit due to its expenditiure of money due to economic growth. Due to this there will be inflation and after that the trade defecit will be reduced by policies which agains leads to trade surplus. Due to shorth term growth there will be long term recession on the economy leading to raise and fall of growth rate of economy.