Question

Use the intertemporal trade model to show why some countries might benefit from borrowing while others might benefit from lending

Answer 1

In the intertemporal trade model, you have two countries in two time periods. One country might believe in savings and at the same time the other country might use domestic savings for investment purpose.

Some countries might get benefits from borrowing in the following ways:-

It allows the government to spend money when it needs to, not just when taxes are collected.It creates mutual ties between the government and its citizens and with other governments.

A second advantage is that it allows government to be flexible in fiscal policy. If a government has no debt, it has no way to stimulate the economy during a recession.If a government has no debt, it also cannot show that it is credit-worthy. If it suddenly needs to borrow, it will have to pay high interest rates.

On the other hand some countries might benefit from lendings in the below mentioned ways:-

1)It promotes international monetary co-operation and global financial stability.

2)It provides temporary financial help to countries in debt – particularly those with balance-of-payments problems.

3) It encourage economic growth of the country who lends the money.

4)It gives financial advice to countries about how to run their economies.

5) Creation of good relations with other poor countries. At the time of crisis they can also borrow.

6) The lending money earns a good interest rate.