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Chapter 10: Q 37. (page 267)

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.

Short Answer

Expert verified

This is not true.

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.

When a trade deficit happens, it means that there is a high inflow of capital and high costs as imports exceed exports. Moreover, the US economy mainly invests foreign financial capital in welfare programs.

Thus, a trade deficit in the domestic sector like autos is not because of a lack of competitiveness but because of the inflow of financial capital.

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