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Chapter 10: Q. 2 (page 265)

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

Short Answer

Expert verified

The current account balance is lower when the trade deficit of the United States increases.

Step by step solution

01

Step 1. Definition of trade deficit.

When the country's import exceeds its export, there is a trade deficit in the country. It is calculated by subtracting the value of the exported goods from the value of the imported goods.

02

Step 2. Meaning of current account balance.

The current account of a nation shows the value of trade in goods and services along with the flow of income and aid. Balance in current account means that the nation is recieving the same amount of money it is sending.

03

Step 3. The impact on the current account balance.

Since, the trade acocunt or trade and goods and services is a component of current account, a trade deficit would mean that the value of current account balance would decline. The country would be recieving less income through exports but would be spending more on imports.

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Most popular questions from this chapter

The GDP for the United States is \(18,036billion and its current account balance is -\)484billion. What percent of GDP is the current account balance?

Many think that the size of a trade deficit is due

to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.

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

a. Export sales to Germany

b. Returns paid on past U.S. financial investments in Brazil

c. Foreign aid from the U.S. government to Egypt

d. Imported oil from the Russian Federation

e. Japanese investors buying U.S. real estate

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

Occasionally, a government official will argue that

a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Explain why such a statement is economically impossible.
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