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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?

Short Answer

Expert verified

A trade surplus benefits an economy because it signifies a large inflow of foreign capital, many goods and services are consumed with foreign dollars which increases the money circulating in the economy. That will increase domestic demand as the money supply is greater.
A trade surplus at the wrong time, however, during a period of high inflation can have a negative result, as the high level of domestic demand and money supply may inflate the cost of limited goods in the country, A country with a surplus means it exports more than it imports. This means that there are fewer goods domestically, if this becomes too skewed, there will be more money than goods to go around, resulting in inflation and a devaluing of currency in the long run.
The key factor in trade surplus outcomes is at what stage the economy is at, expansionary or recessionary.

Step by step solution

01

Step 1. Trade Surplus

A trade surplus is an economic measure of a positive balance of trade, where a country's exports exceed its imports.

02

Step 2. Explanation

A trade surplus benefits an economy because it signifies a large inflow of foreign capital, many goods and services are consumed with foreign dollars which increases the money circulating in the economy. That will increase domestic demand as the money supply is greater.
A trade surplus at the wrong time, however, during a period of high inflation can have a negative result, as the high level of domestic demand and money supply may inflate the cost of limited goods in the country, A country with a surplus means it exports more than it imports. This means that there are fewer goods domestically, if this becomes too skewed, there will be more money than goods to go around, resulting in inflation and a devaluing of currency in the long run.
The key factor in trade surplus outcomes is at what stage the economy is at, expansionary or recessionary.

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Most popular questions from this chapter

Explain the relationship between a current account deficit or surplus and the flow of funds.

In 2001, the United Kingdom's economy exported goods worth £192 billion and services worth another £77 billion. It imported goods worth £225 billion and services worth £66 billion. Receipts of income from abroad were £140 billion while income payments going abroad were £131 billion. Government transfers from the United Kingdom to the rest of the world were £23 billion, while various U.K government agencies received payments of £16 billion from the rest of the world.

a. Calculate the U.K. merchandise trade deficit for 2001.

b. Calculate the current account balance for 2001.

c. Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001.

A government official announces a new policy. The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is contradictory.

Table 10.7 provides some hypothetical data on macroeconomic accounts for three countries represented by A, B, and C and measured in billions of currency units. In Table 10.7, private household saving is SH, tax revenue is T, government spending is G, and investment spending is I.


ABC
SH700500600
T00500500
G600350650
I800400450

Table 10.7 Macroeconomic Accounts

a. Calculate the trade balance and the net inflow of

foreign saving for each country.

b. State whether each one has a trade surplus or

deficit (or balanced trade).

c. State whether each is a net lender or borrower

internationally and explain.

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1%of Germany’s GDP; private savings is 20%of GDP, and physical investment is 18%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?

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