Reference no: EM133711938

Question 1

Utopia and Toughtimes are two neighboring countries. Both countries have a savings rate of 20% and follow a fixed exchange rate regime with their currencies pegged to the US dollar. The US is also the largest export market and trading partner for these two nations. The tables below summarize the economic performance of Utopia and Toughtimes over the last five years (2018-2022). Over the same time period the real GNP of US has grown at an average rate of 2.5% and its inflation rate has been 3%.

	Utopia
	2018	2019	2020	2021	2022
Current Account balance (billion dollars)	-45	-38	-44	-48	-55
GNP (billion dollars)	1000	1020	1035.3	1050.83	1071.85
Budget deficit (billion dollars)	20	37	45	94	115
Inflation rate (%)	4	6	7	7	8
Unemployment rate (%)	3	3.5	5	6	6.5

 

	Toughtimes
	2016	2017	2018	2019	2020
Current Account balance (billion dollars)	-37	-37	-38	-39	-37
GNP (billion dollars)	800	816	840.48	865.69	891.67
Budget deficit (billion dollars)	20	15	12	8	4
Inflation rate (%)	4	3.5	3	2.8	2.5
Unemployment rate (%)	6	5	5	4.5	4

Budget deficit is the difference between government expenditure and tax revenue (G-T). The GNP, Current Account balance and the budget deficit are adjusted for inflation (i.e., they are measured in constant US dollars).

(a) Create a brief report evaluating the economic performance of Utopia and Toughtimes from 2016-2020. The conclusion of your report should address the following question:

"Is there any danger of either of these countries experiencing an economic crisis in near future? Why or Why not?"