Answers to eThemes of the Times

for Krugman/Obstfeld
International Economics: Theory and Policy, 7e

Chapter 1: Introduction

"U.S. and Trade Partners Maintain Unhealthy Long-Term Relationship"
By Louis Uchitelle, New York Times, Saturday, September 18, 2004

1. The subject of this article centers on the current account balance. Does this seem like an "international trade" or an "international money" issue?

Answer: Aspects of the issue seem to overlap with both areas of international economics. The article discusses goods and services transactions [trade], as well as international borrowing and exchange rates [money].

2. Many economists seem to be giving the issue of the current account a lot of thought. Does there seem to be a consensus in the article? Does your answer surprise you?

Answers will vary. If anything, the consensus is confusion—confusion at how the deficit has persisted for so long with no severe consequences. Bergsten stands out as the most alarmed, though almost every economist seems a bit concerned about the trade deficit. This economist, on the contrary, is not concerned at all about the current account deficit, and you may come to your own conclusion upon reading further chapters. In general economists tend to agree about many big-picture issues, but may disagree occasionally where the data is open to interpretation or when more ideological considerations come into play.

3. Near the end of the article there is a logical fallacy about the current account deficit. Can you find it?

Answer: The 4th to last paragraph begins with the sentence "[w]ith less and less production at home…" This sentence is fallacious because the current account does not imply that less production is taking place at home—in fact GDP has been rising steadily year after year, even while the U.S. runs a large trade deficit—it implies that