Practise balance-of-payments calculations and exchange-rate diagrams, then evaluate persistent deficits, capital flows and policy correction in IB Economics HL questions.
The following diagram illustrates the domestic market for rice in Country Alpha. This diagram will be used for several of the following questions.
The following table provides selected data from the balance of payments for Alpha for 2016.
Table 1
Using the data in Table 1, calculate Alpha's current account balance for 2016.
Outline how Alpha's current account balance for 2016 is likely to affect the exchange rate of its currency.
Following the depreciation, it is observed that the current account balance worsens initially, but improves after a certain period of time. Explain why this might be expected to happen.
Table 1 shows the gross domestic product (GDP) of the United States of America (USA) economy from 2020 to 2023. The USA is not the fastest growing economy in the world, but it is the largest. It also has the largest budget deficit and the largest current account deficit in the world.
As a result, the actions of its central bank, the Federal Reserve, always make news.
Table 1
Table 2 shows the current account and capital account of the balance of payments, quarterly, for the USA in 2023. It shows that the USA has a persistent current account deficit, and that the main component of that deficit is the balance of trade in goods and services. The country's relatively high labour costs, labour unions and skills shortages in STEM (science, technology, engineering and mathematics) all contribute to the trade deficit.
Table 2
The USA recorded a trade deficit of USD 819 billion in 2023. This was a slight reduction from 2022, when it was USD 951 billion. One of the reasons for the fall in the trade deficit could be the exchange rate. In the final four months of the year, the USD depreciated against the Chinese Yuan (CNY). China is the USA's largest trading partner, even though recent trade relations between the two countries have been characterized by tariffs and retaliatory measures. Figure 1 shows the price of the USD in terms of the CNY from September to December 2023.
Figure 1
To try and achieve the macroeconomic goals of monetary policy, the Federal Reserve significantly increased the money supply in the USA between 2008 and 2023. It also conducted four rounds of quantitative easing from 2008, totalling USD8900 billion.
Economists and policymakers hold different views on how the current account deficit affects the USA's economy. Some highlight positive outcomes, suggesting that, as the economy grows, citizens can enjoy increased access to goods and services from abroad. Others express concerns about potential negative consequences, including fewer job opportunities and slower economic growth.
The Federal Reserve has a target inflation rate of 2 %.
The US Bureau of Labor Statistics, however, recorded that the inflation rate from January 2023 to January 2024 was 3.1 \%, well above the target rate. Over the same period, households in the USA could borrow money from a commercial bank at a nominal interest rate of 8.5 %.
Using Table 2, calculate the deficit or surplus in the balance of trade in goods and services for Quarter 3 (Q3) only.
Using Table 2, calculate the size of the financial account for Quarter 4 (Q4) only.
Using the text/data provided and your knowledge of economics, recommend a policy that the government of the USA could introduce to correct its persistent current account deficit, without intervention in foreign exchange markets.