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Chapter 23: Q. 15 (page 576)
Why does a recession cause a trade deficit to increase?
During a recession, incomes fall, and consumers buy fewer goods, including imports which leads to a increase in trade deficit.
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State whether each of the following events involves a financial flow to the U.S. economy or away from the U.S. economy:
Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of of Germany鈥檚 GDP; private savings is of GDP, and physical investment is of GDP.
a. Based on the national saving and investment identity, what is the current account balance?
b. If the government budget surplus falls to zero, how will this affect the current account balance?
Occasionally, a government official will argue that a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Explain why such a statement is economically impossible.
Describe a scenario in which a trade surplus benefits an economy and one in which a trade surplus is occurring in an economy that performs poorly. What key factors or factors are making the difference in the outcome that results from a trade surplus?
If you observed a country with a rapidly growing trade surplus over a period of a year or so, would you be more likely to believe that the country's economy was in a period of recession or of rapid growth? Explain.
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