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Chapter 23: Q. 38 (page 577)

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.

Short Answer

Expert verified

If a country is observed with a rapidly growing trade surplus over a period of a year or so, it would be more likely to believe that the country's economy was in a period of recession.

Step by step solution

01

Step 1. Trade balance

If a country has a significant trade surplus, it is more likely that the economy is in recession. When a country's economy is in recession, unemployment is high and GDP is low. Consumption is very low in this economy, and exports outnumber imports due to a drop in the price of domestic goods. As a result, the trade balance is positive.

02

Step 2. Explanation

As a result, a drop in price due to the recession may attract buyers from other countries, resulting in an increase in exports and a positive trade balance. As a result, a trade surplus does not indicate strong economic growth.

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Most popular questions from this chapter

Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of \(100 billion, total domestic savings of \)1,500 billion, and total domestic physical capital investment of \(1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by \)50 billion, while the budget deficit and national savings remain the same?

Is it better for your country to be an international lender or borrower?

Why does a recession cause a trade deficit to increase?

State whether each of the following events involves a financial flow to the U.S. economy or away from the U.S. economy:

  1. Export sales to Germany
  2. Returns paid on past U.S. financial investments in Brazil
  3. Foreign aid from the U.S. government to Egypt
  4. Imported oil from the Russian Federation
  5. Japanese investors buying U.S. real estate

If a country is running a government budget surplus, why is (T 鈥� G) on the left side of the saving-investment identity?
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