Balance of Payments & International Investment Position

The ratio of the net international investment position to GDP evolves according to the dynamic equation:
!! − ! !! − !!
Δ! =! −!!! =! + 1+! !!! + 1+! !!! +!
In the questions that follow, assume ! = 0.
a) State algebraically the condition under which a country can run a trade deficit yet experience an improvement in its net foreign asset position. Explain the different factors that might generate this configuration.
b) Suppose the trade deficit is −0.05 and the inherited net foreign asset position from the end of period − 1 is −0.20. The output growth rate is +0.03, the gross stock of foreign assets (as a fraction of GDP) at the end of period − 1 is 1.20, the return on liabilities is +0.02 and the return on assets is +0.05. What is !? Interpret.
c) Consider the same conditions as in b) except that the country in question is now a creditor, with !!! = +0.20. What is !? Interpret.
d) Suppose !! = !! = 0.04, = 0.02, and !!! = −0.50. What value of the trade balance is required in order to stabilise the net foreign asset position at ! = −0.50?
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e) Now suppose that !! = !! = 0.01, = 0.02, and !!! = −0.50. What value of the trade balance is required in order to stabilise the net foreign asset position at ! = −0.50? Comment on the differences between the answers to parts d) and e).
f) Download Lane and Milesi-Ferretti’s updated External Wealth of Nations II dataset from What were the NFA-CA (net foreign assets-current account) configurations for China, USA, Ireland and Malta in the year 2010 (e.g. country X had positive NFA and positive CA in year 2010. Note that NFA is a stock variable reported at the end of the year, while CA is a flow variable). Comment on any two of these configurations. Using your knowledge about Ireland, what impact is net factor income from abroad (NFIA) having on its current account position? Explain.
g) Write an essay (max. 1200 words) examining the trend in global external imbalances over the past 15 years. A significant part of your essay should be devoted to analysing the external adjustment phase during the global crisis.

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