ECON3520 - Assignment 1 PDF

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ECON3520 – Assignment 1 Harvard economists Hausmann and Sturzenegger disagree with the popular economic conclusion that America is the world’s biggest debtor. They have attempted to rationalise the paradox of America running chronic trade deficits and yet earning more on its foreign assets than it pays out to service its much larger stock of debts. In their view, official data fails to record the true value of wealth held by American households and firms. While it is accepted that America earns a higher return on its overseas assets than foreigners earn on investments in America, Hausmann and Sturzenegger theorise that in order to resolve the ‘paradox’, the $2.5 trillion of American debt must be further scrutinised as opposed to the $36.2 billion of American income. For America to out-earn foreigners, it must have “invisible foreign wealth’ which they refer to as “dark matter”. In accordance with this, America should be running a net-credit on its current account balance. Hausmann and Sturzenegger elect to value America's net foreign assets at 20 times their annual earnings, corresponding to a rate of return of 5%. Applying this ratio, America's national foreign assets and liabilities would actually be valued at $724 billion, as opposed to minus $2.5 trillion.

Q2.)

1. 2. 3. 4. 5.

CA = -$120,000 + $120,000 = 0 CA = 0, FA = -$5,000 + $5,000 = 0 CA = -$200, FA = +$200 CA = 0, FA = - (1 million dollars) + (1 million dollars) CA = +$2,500, FA = -$2,500...