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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

How does the bottom portion of Figure 10.3, showing the international flow of investments and capital, differ from the upper portion?

What are the main components of the national savings and investment identity?

If a country is a big exporter, is it more exposed to

global financial crises?

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.

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.
See all solutions

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