1. A current account consists of the balance of trade in goods, services and income. The exact trade deficit in the Czech Republic in 1996 was $5,877 million. The balance on trade in services was a positive $1,916. The income balance was only slightly negative at -$722.  Hence, most of the current account deficit was due to the large imbalance of trade in goods.
2. The Czech central bank spent around $3 billion of its foreign exchange reserves to buy koruny. This move was aimed at decreasing the supply of koruny and keeping its value high.  Despite this intervention, these efforts proved ineffective in the end as the koruna was devalued.
3. The central bank sent interest rates "skywards" in order to encourage investors and the public to keep their wealth in koruna denominated assets. High interest rates also discouraged borrowing in koruna.  Borrowing was used to speculate against the value of the koruna.  Speculators borrowed in koruna and use the loan to buy dollars.
4. An import charge of 8% made foreign goods more expensive and discouraged imports, reducing the trade deficit. Tax hikes and spending cuts were aimed at increasing national savings and reducing aggregate demand. Since the current account equals the gap between savings and investment, higher savings will reduce the current account deficit.
5. Bankruptcies allow for an exit of inefficient companies. If companies which are losing money are forced to declare bankruptcy, resources can be moved into more efficient uses.  In market economies, the process of entry and exit is the major source of gains in aggregate productivity.

Part II:

 

	1993	1994	1995	1996	1997
Exchange rate (koruny per dollar)	30	28	27	27	35
Czech CPI	83	92	100	109	118
U.S. CPI	95	97	100	103	105
Czech Nominal Wages	71	84	100	118	131
Czech Real Labor Productivity	94	81	100	108	107
Real exchange rate	34.3	29.52	27	24	31
Real wage =nominal wage/cpi	86	91	100	108	111
Real wage growth		7%	10%	8%	3%
Real labor productivity growth		-14%	23%	8%	-1%

1. During the four years covered in the table, Czech currency experienced sustained real appreciation. This is because Czech inflation outpaced that in the U.S., while the nominal exchange rate was kept fixed. Czech goods were becoming more and more expensive relative to foreign goods which resulted in a large current account deficit.
2. In the four years before the crisis, real wages and labor productivity in the Czech Republic did not move in unison. In a market economy workers should be paid their marginal product, which under linear technology is equal to labor productivity. The fact that wages did not move with productivity indicates that Czech companies did not behave as market oriented firms. Real wages grew on average by 8.2% a year, while labor productivity grew only 5.9% a year. When wage growth outpaces the growth in productivity, costs per unit of production increase and goods become uncompetitive. This contributes to the trade deficit.