Question

FRED Exercise

Current Account

Since international capital flows is our topic this week, as promised, your first task is to graph the recent evolution of the quarterly U.S. Current Account Balance (National Accounts basis) as a percentage of GDP from 1980 through Q1 2019, the latest available quarter.

For this exercise, you must create the current account/GDP ratio yourselves by first accessing the quarterly, seasonally adjusted annual rate Current Account Balance (National Accounts basis) series, FRED code = NETFI.   (Make sure this is the quarterly series.) Then, while in “Edit Line 1,” type in “GDP” in the dialog box labeled “You can begin by adding a series to combine with your existing series.”   Among the available series options, scroll down to find “Gross Domestic Product Billions of Dollars Quarterly Seasonally Adjusted Annual Rate.” (Careful. You do not want to upload “Real Gross Domestic Product …..”   Click on the correct series; then click on “Add.” You should now have two series, “a” and “b.” Finally, simply transform the series by computing the ratio of the Current Account Balance) to GDP, expressing it as a percentage. So if series “a” = current account; series “b,” GDP, then you’d enter “(a/b)* 100” into the series transformation box.

(i)                  Print out this graph and attach it.     (1.0 point)

(ii)                What is the Q1 2019 value of this ratio, rounded to 2 decimal places? (.2 points)

(iii)               For the most part, what happens to the Current Account Balance as a percentage of GDP during recessions? Why do you think that is the case? (.4 points)

(iv)               Is the evolution over the past few years of the U.S. current account balance as a percentage of GDP really that alarming? Why or why not? (.4 points)

Answer 1

Figure 1

1. The Q1 2019 value of this ratio is -2.40
2. For the most part, the current account balance as a percentage of GDP rises during the recession. This is because, during the recession, the investor loses confidence in the domestic economy pull out funds, the NCO rises and the demand for domestic currency falls. this depreciates the currency and makes export cheaper. This increases the trade balance and current account improves. Hence, the current account as a percentage of GDP rises during the recession.
3. During the past few years, as the economy is recovering from the great recession, the current account balance is stable as a percentage of GDP. This shows a steady state and not alarming for the economy at all.