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Chapter 10: Q. 14 (page 266)

If domestic investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?

Short Answer

Expert verified

Trade deficit should rise.

Step by step solution

01

Step1. Introduction

The savings-investment identity is-

(S-I) = (X-M)

S- Savings

I- Investments

X- Exports

M- Imports

X-M= Trade Balance

02

Step2. Explanation

As their exist a trade deficit, X-M is negative. When domestic investment increases, the S-I shall reduce, further increasing the trade deficit.

This is held true when there is no change in the amount of private and public saving.

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