Question

2. If Germany is running a trade surplus, what must be true of its capital flows on net (Savings versus Investment)? How do you know? How would the German government running a budget deficit impact the initial current account surplus? Illustrate and explain.

Answer 1

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Question:

Answer:

Current Account = Savings – Investment

Current account is a part of BOP and cobination of tarde account and  payments made to foreign investors, and transfers.

Trade surplus means the country export than import or net export is positive.So it will be in surplus when the saving is higher than the investment.  A increase in savings means people are spending less therefore, this would not tend to suck in imports as we buy goods and services from abroad and export is higher than import. it is favorable for the government and help out in the managing the BOP.

Budget deficit occur when the spending of the government higher than the government's revenue. Or the gap of revenue and spending is negative. When the deficit in crease its increase the burden on the government and the government funding this deficit by the external borrowing. The government issue bond in the open market and borrow money. When the government borrow outside then its increase the interest payment of the government. Increasing interest payment means decreasing net income or it may be negative. It means the governmet net income beome negative that negatively affect the current account. So, the current account surplus could be converted into current account deficit.

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