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Chapter 10: Q 33. (page 267)

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.

Short Answer

Expert verified

Yes, these statements are contradictory.

Step by step solution

01

Step 1. Definition

A trade deficit is when there are exports less than imports, which is basically the opposite of a trade surplus.

02

Step 2. 

If a country wants to encourage investment from foreign companies, then there is an outflow of capital to other nations.

The inflow of financial capital is defined as when imports of a country exceed exports as people of the country are buying foreign goods and services with their money, thus the trade deficit increases.

That鈥檚 why the elimination of trade deficit and encouragement of financial capital together will not work in economics.

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Most popular questions from this chapter

What is included in the current account balance?

If a country is running a government budget surplus, why is (T 鈥� G) on the left side of the saving investment identity?

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany鈥檚 GDP; private savings is 20% of GDP; and physical investment is 18% of GDP.

a. Based on the national saving and investment identity, what is the current account balance?

b. If the government budget surplus falls to zero, how will this affect the current account balance?

In 2001, the United Kingdom's economy exported

goods worth 拢192 billion and services worth another 拢77 billion. It imported goods worth 拢225 billion and services worth 拢66 billion. Receipts of income from abroad were 拢140 billion while income payments going abroad were 拢131 billion. Government transfers from the United Kingdom to the rest of the world were 拢23 billion, while various U.K government agencies received payments of 拢16 billion from the rest of the world.

a. Calculate the U.K. merchandise trade deficit for

2001.

b. Calculate the current account balance for 2001.

c. Explain how you decided whether payments on

foreign investment and government transfers

counted on the positive or the negative side of

the current account balance for the United

Kingdom in 2001.

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