Briefly describe the difference between the “merchandise trade balance” and the “current account balance.” Which one do we typically hear about on the news? (2 points)
Merchandise trade balance is also called the sum of all export and import balance differences, so when you export and import stuff from other countries, both countries make money, and the difference between the price in difference countries is the merchandise trade balance. However, the current account balance is the balance of good and services that are made by the trade, such as current transferred payments and profits.
In the context of the national savings and investment identity, briefly describe the main sources for both the supply of and demand for capital in the U.S. economy. (2 points)
There are two main sources for supply of capital in the U.S. economy, the first one is saving by every individuals and firms, and the second one is the inflow of financial capital from foreign investors.
There are two main sources for demand for capital in the U.S. economy as well, the first one is private sector investment, and the second one is government borrowing.
Briefly explain how short-term movements in the business cycle affect the trade balance. (1 point)
In the short-term, when there is a recession or upswing, it could affect the trade balance. In a recession, it makes a trade deficit smaller, or trade surplus bigger. In an upswing, it is opposite, it make a trade deficit larger, or a trade surplus smaller.
Briefly contrast a nation’s level of trade with its balance of trade and identify three factors that strongly influence a nation’s level of trade. (1 point)
A country could have a high level of trade, but still with a near-balance between exports and imports, since a high level of trade means that a large percentage of the nation’s production is exported. A country’s trade could also have a low portion of GDP, but with a huge gap between its exports and imports.
Identify and list from greatest to smallest the main budget categories for the US federal government. (1 point)
Other spending > Health care > Social security > National defense > Interest payments > Education
Write out the equation for the demand and supply of loanable funds in equilibrium. Use this equation to briefly describe how changes in government budgets can affect the trade balance. Include any assumptions you make about the other components of the demand and supply of savings. (2 points)
Equation: S + DH + BM +DI = I + DS + H ( (S – DS) + BM = I – DI = H – DH )
(S: Savings; DH: Dishoarding; DI: Disinvestment; I: Demand; H: Hoarding; DS:Dissaving (negative balance on savings))
The supply loanable funds is the amount of national savings, which is the total income of the country. It is calculated by deducting consumption and gov. purchases. The demand for loanable funds is the level of investment in the country’s economy. The equilibrium between supply and demand determine the market interest rate.
Explain the difference between a progressive tax, a proportional tax, and a regressive tax. (1 point)
A progressive tax is a tax has larger portion of income from high-income people than low-income people.
A proportional tax is a tax has the same percentage from all different level of income groups.
Regressive tax is a tax has larger percentage of income from low-income people than high-income people.