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Chapter 10: Q. 13 (page 266)

What determines the size of a country鈥檚 trade deficit?

Short Answer

Expert verified

Size of Imports, exports, savings and spending.

Step by step solution

01

Step1. Introduction

Trade deficit refers to the country's trade balance when the imports of the country exceed the exports of the country.

02

Step2. Explanation

Trade deficit is the difference of exports and imports in a scenario when the imports exceed exports.

As the definition suggests, it is the size of exports and imports which shall determine the size of trade deficit.

Larger the size of imports, larger will be trade deficit and vice versa.
Smaller the size of exports, larger will be trade deficit and vice versa.

Size of saving increases, smaller will be trade deficit and vice versa.

Size of investment increases, larger will be trade deficit and vice versa.

These relations are based on savings-investment identity.

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Most popular questions from this chapter

If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?

Will nations that are more involved in foreign

trade tends to have higher trade imbalances, lower trade imbalances, or is the pattern unpredictable?

What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?

Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.

a. Living in an especially large country

b. Having a domestic investment rate much higher than the domestic savings rate

c. Having many other large economies geographically nearby

d. Having an especially large budget deficit

e. Having countries with a tradition of strong protectionist legislation shutting out imports

Both the United States and global economies are booming. Will U.S. imports and/or exports increase?
See all solutions

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