The effect of productivity shock.

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Chapter 5, Problem 7AP

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To Analyze:The effect of productivity shock.

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Problem 3. An economist writing a column in a well-known paper makes the following announcement. "There are good news and bad news. The good news is Turkey had a temporary beneficial productivity shock that will increase output; the bad news is that the increase in output and income will lead domestic consumers to buy more imported goods, and our current account balance will fall." Assuming that Turkish economy is a small open economy, analyze this statement (is it true or false?, why?) taking as given that a beneficial productivity shock has indeed occurred. Problem 4. Plot MPKf vs. K+1 graph. Explain why the slope of the curve is as you plot. Using this graph explain how Kr+1 and It will change with the following changes. Make the analysis separately for each event. a) Future value of total factor productivity is expected to increase. b) The tax rate on revenues of the firms decreases. c) Relative price of capital goods increases. d) Expected real interest rate increases.

Now consider a small open economy, assuming domestic output is held constant and the country initially has a current account deficit. Explain the impact of an increase in government spending on the current account using both words and graphs.

International Finance and the Exchange Rate - End of Chapter Problem At a family gathering, one of your cousins says, "We spend so much more on imports than other countries spend on our exports. It isn't fair, and we should raise tariffs on imports to reduce how much we buy from other countries." How might you explain to your cousin that current account deficits aren't necessarily a sign of economic troubles to come? Our current account deficits mean we obtain cheaper goods than we could otherwise. Most economists agree that an unequal bilateral trade balance is nothing to worry about. Contrary to common belief, the current account deficit does not suggest that we are living beyond our means. The flip side of the current account deficit is a financial account surplus, which could enhance future growth if the foreign spending it entails is directed toward high-quality investments.