Country external wealth at the beginning of period

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Consider a two-period economy that has at the beginning of period 0 net foreign assets of 100. In period 0, the country runs a current account deficit of 5 percent of GDP, and GDP in both periods is 120. Assume the interest rate in periods 0 and 1 is 10 percent. 1. Find the trade balance in period 0, the current account balance in period 0, and the country's external wealth at the beginning of period 1. 2. Is the country living beyond its means? To answer this question, find the country's current account balance in period 1 and the associated trade balance in period 1. Is this value for the trade balance feasible? [Hint: Keep in mind that since expenditures cannot be negative, the trade balance cannot exceed GDP]. 3. Now assume that in period 0, the country runs instead a much larger current account deficit of 10 percent of GDP. Find the country's external wealth at the end of period 0. Is the country living beyond its means? If so, why?

Reference no: EM131236647

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