international finance econ I just need help on B and C III

international finance econ

**I just need help on B and C, **

III. Saving and Current Account Read the article \"White House preparing for trade crackdown\" by Andrew Restuccia and Doug Palmer (Jan. 7, 2018) available at https://www.politico.com/story/2018/01/07/trump-trade- crackdown-327283 (a) If the Trump government decides to take an aggressive action by imposing harsh tariffis on Chinese imports, what is the motivation behind? In other words, what kinds of economic benefits President Trump is expecting when imports from China are reduced? Now, let\'s check if import tariffs would do an expected job. Consider national income identity: Y-C+I+G+ CA (b) Solve for CA as a function of private saving (s\"), investment (), and government budget (T U.S. tariffs on Chinese imports affect its private saving, domestic ou agree that import restrictions would necessarily (c) How would higher reduce a U.S. current account deficit?

Solution

(b) Y = C + I + G + CA                             (1)

CA = X-M

Adding taxes to the equation,

(Y-T) –C –I – (G-T) = CA

(Y-T) = Yd(disposable income)

(Yd - C) + (T-G) - I = CA

Sp + Sg - I = CA                                   (2)

In equation 2, Sp stands for private savings, Sg stands for government savings

Sp = Yd – C

Sg = T - G

Now, if there is a budget deficit and other things remain constant, there will be fall in a current account. And a change in private savings and investment can also lead to CA deficit as well.

(C) CA = (Sp – I) + (T – G)

There will be very little or no impact on private savings, investment, and budget deficit. There is a possibility of an increase in investment due to increased tariffs and make a bad impact on current account. But investment might fall also because of increase in the cost of imported intermediate goods due to increase in tariffs. There will be a reduction in budget deficit if there will be higher tariffs because there will be fewer imports than before. Imports restriction leaves the current account balance unchanged because it decreases the profitability generating exports. The overall result is that the quantities of both imports and exports decrease, but the difference - the balance - remains unchanged.