1234 Essay

1357 words - 6 pages

Question 1
(i)
Trade balance, GDP and Ratio of the trade balance to GDP in Finland(1980-2006) |
Year | Trade Balance | GDP | Ratio of the trade balance to GDP |
| Billion (euro) | Billion (euro) | |
| (TB) | (Y) | (TB/Y) |
1980 | -0.461 | 33.267 | -0.01 |
1981 | 0.363 | 37.593 | 0.01 |
1982 | 0.049 | 42.258 | 0.00 |
1983 | -0.040 | 47.163 | 0.00 |
1984 | 1.298 | 52.695 | 0.02 |
1985 | 0.479 | 57.345 | 0.01 |
1986 | 0.678 | 61.492 | 0.01 |
1987 | 0.137 | 66.766 | 0.00 |
1988 | -0.468 | 75.728 | -0.01 |
1989 | -1.441 | 84.801 | -0.02 |
1990 | -1.200 | 89.535 | -0.01 |
1991 | -0.353 | 85.767 | 0.00 |
1992 | 0.690 | 83.124 | 0.01 |
...view middle of the document...

Coefficients which are closer to -1/+1 show a stronger linear relationship, while those are approaching 0 exhibit less relationship (uncorrelated) between 2 variables.
The 5 correlation coefficients are all positive, which means that there is a positive linear relationship between trade balance and 5 periods of GDP growth. In other words, as the change in trade balance increases, the 5 periods of GDP changes also increase.
The positive sign in 5 correlations also implies that the correlation pattern does not change across the leads and lags; the linear relationship (correlation pattern) remains positive over 5 periods.
And based on the (absolute)correlation coefficient, the current trade balance is most strongly correlated with future GDP growth, one year beyond current GDP growth (t+1). Because the correlation coefficient of (t+1) correlation is largest (closest to +1), 0.61.

(iv) There are 3 types of change in income:
1. Transitory: If there is an increase in income, the IBC would be shifted outwards, which would have an increased output only in the current period and a trade surplus would also appear in the current period.
2. Permanent: If the income rises in both current and future periods, the IBC would be shifted outwards, consumption in both current and future periods would increase by the same amount as the increase in income and a permanent increase in GDP. But there would not be any change in trade balance or savings.
3. Anticipated ‘new shock’: If households receive good news, they would predict a rise in future income, which refers to an increase of income in future periods. IBC would be shifted outwards. Consumption rises even there is no increase in GDP in the current period, the economy would run a trade deficit, which send back a desire of households to smooth consumption.
The above 2 graphs demonstrate the current GDP and trade balance in Finland over 1980-2006.
It shows that the GDP is increasing in Finland over years, expect the year of 1991-1993. For the trade balance in Finland, it is increasing overall although it is decreasing prior 1990. Such relationship between GDP and trade balance is said to be positive linear, and so as the correlation (mentioned in part iii).
It can be described as the transitory increase in GDP as it also resulted with higher output and trade surplus in the current period. And the correlation between GDP and trade for transitory change in income is also positive, because the output rises with the increasing trade balance (trade surplus).
Therefore, the estimated correlation coefficient is consistent with the prediction of transitory increase in GDP in the inter-temporal model with the same (positive) sign of correlation.

Question 2
(i)
US recession periods: | UK recession periods: | AUS recession periods: |
1. Dec 1969Mar 1970 | 1. Sept 1961Dec 1961 | 1. Dec 1960Mar 1961Jun 1961Sep 1961 |
2. Sep 1974Dec 1974Mar 1975 | 2....

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