You have the following data for GDP per capita in 1990 and in 2024:

Japan Australia Italy World
1990 $25,265 $18,249 $23,297 $6,803
2024 $33,960 $64,550 $41,090 $14,210

Based on this information, you expect Japan's trade balance to be ______ in 1990.

Hint: Compute the average annual growth rate of GDP per capita between 1990 and 2023 for each country and the world economy to answer this question. Round the growth rates to the nearest tenth of a percent.

Question

You have the following data for GDP per capita in 1990 and in 2024:

Japan	Australia	Italy	World
1990	$25,265	$18,249	$23,297	$6,803
2024	$33,960	$64,550	$41,090	$14,210

Based on this information, you expect Japan's trade balance to be ______ in 1990.

Hint: Compute the average annual growth rate of GDP per capita between 1990 and 2023 for each country and the world economy to answer this question. Round the growth rates to the nearest tenth of a percent.

BlackTom AI · Accepted Answer

We begin by restating the question and the options to keep the context clear.
Question: You have GDP per capita data for 1990 and 2024 (Japan, Australia, Italy, World). Based on this information, you expect Japan's trade balance to be ______ in 1990. Answer options: negative, approximately zero, positive.

Next, we analyze what the growth figures imply and how they relate to the trade balance in 1990.
- The hint asks us to compute the average annual growth rate (compound annual growth rate, CAGR) of GDP per capita from 1990 to 2023 (approximated here using the 1990 and 2024 figures). This helps characterize whether Japan was growing briskly, stagnating, or slowing relative to the global backdrop.
- Rough CAGR calculations (approximately):
  • Japan: from 25,265 in 1990 to 33,960 in 2024 → growth factor ≈ 1.343. Over about 34 years, CAGR ≈ (1.343)^(1/34) − 1 ≈ 0.9% per year (positive, but modest).
  • World: from 6,803 to 14,210 → growth factor ≈ 2.09. CAGR ≈ (2.09)^(1/34) − 1 ≈ 2.2% per year (higher on average than Japan).
  • Australia and Italy show larger CAGR magnitudes, but the specific figure for Japan remains a modest positive growth.

Now, what does a positive but relatively modest GDP per capita growth imply for Japan’s 1990 trade balance?
- Trade balance is influenced by savings behavior, investment, and demographics, not growth alone. However, historically, Japan in the late 1980s and 1990s ran large current account surpluses, driven by high savings rates and strong export performance, even when growth slowed relative to the world.
- If in 1990 Japan’s economy was expanding, even modestly, but national savings remained high and investment was relatively restrained compared with savings, the current account would tend to be positive (a trade surplus). This aligns with the long-run pattern for Japan around that period.

Now evaluate each answer choice against this reasoning:
- Negative: This would imply a trade deficit in 1990, meaning Japan imported more than it exported. Given Japan’s known export strength and high savings, a deficit in 1990 would be inconsistent with the typical current account position Japan held at that time. This option relies on a scenario (low savings or high investment without offsetting exports) that isn’t supported by the broad pattern of Japan’s external balance in that era.
- Approximately zero: A near-zero trade balance would require a precise balance between imports and exports for 1990. While conceivable for some years, the historical record for Japan around 1990 shows substantial trade surpluses rather than a perfectly balanced current account. The data-dependent method (growth rates) does not hint at a shift to a near-zero balance in that year; it points toward continuing surplus tendencies.
- Positive: A positive trade balance indicates a trade surplus. Given Japan’s export orientation, high savings relative to investment during that period, and the broader context of Japan’s external position in the late 1980s/early 1990s, a positive (surplus) balance is the consistent interpretation when describing the likely 1990 balance using the growth-rate lens.

Putting it together, none of the steps contradict the notion that Japan would have a positive trade balance in 1990, especially when considering the persistent current-account surpluses Japan enjoyed around that time. The growth-rate comparison mainly serves to contextualize why Japan’s economy was growing modestly while still running a surplus, rather than producing a deficit or a neutral balance.

Note: If you were to critique any option, the most defensible incorrect choices would hinge on interpreting growth as a direct determinant of the trade balance in a single year; however, the historical pattern at that time favored a surplus rather than a deficit or zero balance for Japan. Keep in mind that real-world accounts involve multiple interacting factors beyond the pure growth rate calculation.

FA25 ECON 302 002 Final Exam

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