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Chapter 10: Q. 15 (page 266)

Why does a recession cause a trade deficit to increase?

Short Answer

Expert verified

Due to capital flow from abroad.

Step by step solution

01

Step1. Introduction

Trade deficit essentially signifies the imports exceeding exports. But the cause of a trade deficit is the rate of investment and savings.

02

Step2. Explanation

Trade deficit as explained is caused by when the rates of public and private savings don't match with the domestic investments.

Since the investment is not matched, during recession, capital inflow occurs from abroad to finance this imbalance.


Hence, as a result of this, the trade deficit during recession widens.

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Most popular questions from this chapter

Occasionally, a government official will argue that

a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Is this possible?

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

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

If countries reduced trade barriers, would the

international flows of money increase?

If the trade deficit of the United States increases, how is the current account balance affected?
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