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Chapter 10: Q. 7 (page 265)

Why does the trade balance and the current account balance track so closely together over time?

Short Answer

Expert verified

Trade balance is a part of current account balance.

Step by step solution

01

Step1. Introduction

Imports refer to the buying of goods/services from the foreign countries.

Exports refer to the selling of goods/services to the foreign countries.

International flow of money primarily refers to the flow of global investments.

02

Step2. Explanation

Trade difference is the difference of exports (X) and imports (M). It may be surplus(X>M) or deficit(M>X).

The current account balance takes into account this number and also accounts the international flows via investments as explained in the previous step.

Hence, since trade difference is accounted for in the current account balance, they are quite related and hence track so closely together over time.

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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?

What is more important, a country鈥檚 current

account balance or GDP growth? Why?

In what way does comparing a country鈥檚 exports to GDP reflect its degree of globalization?

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.

If a country is a big exporter, is it more exposed to

global financial crises?
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