Team Paper 2 Instructions
This team paper will make you apply some of the concepts you have studied so far to a practical case. Your team will be required to find appropriate data and analyze it and to construct a compelling argument. The team paper has four parts. You are free to choose how you divide the work between the members of your team. However, all team members will receive the same grade for their joint work. Should there be any complaints or requests to deviate from that policy, you have to tell me before Friday morning of this week. There is a word limit of 1,500 words excluding data and links.
In this assignment, you will study the external macroeconomic performance of China and the US during the years 2009-2018. For this, you find IMF country reports for the US and China with these instructions. For additional information, download other IMF annual reports. For the data, access to IMF Data online database.
Consistency of data and argument is very important for your report. Do not use data from different sources in different sections of the paper. Be sure that one team member checks for consistency before submitting the paper.
Part 1 (32 points):
Find data for the exports of goods and services (combined), the imports of goods and services (combined), the balance on goods and services (combined), the income balance and the current account balance (all as percent of GDP) for China and the US and the dollar exchange rate of the Chinese Reminbi for the years 2009-2018. Find data for the CPI inflation rates of China and the US and calculate the percentage change in the real exchange rate as
%change Real XR = %change in XR (Reminbi per USD) plus (US CPI inflation rate minus China CPI inflation rate)
Plot the data and describe it. Compare the current account developments of China and the US during this period.
Appropriate sources include the International Monetary Fund’s World Economic Outlook data base and the country reports in this week’s folder.
Part 2 (20 points):
Find data for the main parts of the financial account of China and the US for the years 2009 to 2018: net direct investment, net portfolio investment, net changes in official reserve assets (assets of the monetary authority, for China, this could be the “overall balance”), and the balance on the financial account, all as percent of GDP.
Plot the data, describe the composition of international capital flows for the two countries during this period (overall balance and direct investment, portfolio investment, changes in official reserves or assets of monetary authority), and compare the developments for the two countries.
NOTE: A negative entry in the “changes in official reserves” means that the amount of official reserves in the central bank is increasing.
Part 3: (24 points)
- What do the changes in official reserve assets tell you about the exchange rate policies of the two countries or central banks? Are these policies sustainable in the sense that they can continue for a long time? Explain the reason for your answer.
- What do the data tell you about the development of the net foreign debt of China and the US during this period? Are these developments sustainable in the sense that they can continue for a long time? Explain the reason for your answer.
Part 4: (24 points)
Find data for Gross Domestic Investment and Gross Domestic Savings both in percent of GDP for China and the US for the years 2009-2018 and plot it. The current account balance equals the difference between these two:
CA Balance = (Gross Dom. Savings) – (Gross Dom. Investment)
- How much did each of the two components contribute to the changes in the current account balance during this period in each country?
- How did government fiscal policy, by running budget deficits or surpluses contribute to this in each country? Hint: To answer this question, remember the relationship between government deficits and national savings.
Explain the reasoning behind your answer.
