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Chapter 29: Problem 7

An article in the Wall Street Journal stated, "The trade outlook in the U.S. has improved slightly overall this year. One big factor behind the smaller gap: Stronger growth in Asia and Europe." a. How would stronger growth in Asia and Europe lead to a smaller trade gap? b. The article noted that there was a decline in imports early in the year and that "economic growth [in the United States] remained sluggish overall in the first three months of the year." Is there a connection between a decline in imports and sluggish economic growth? Briefly explain.

Short Answer

Expert verified
a. Stronger growth in Asia and Europe leads to increased demand for U.S. goods, increasing exports and thus reducing the trade gap. b. The decline in imports is a result of a sluggish economy, as there is less consumption or investment, which in turn decreases demand for imported goods.

Step by step solution

01

Understanding effect of foreign growth on U.S. trade balance

When Asia and Europe experience stronger growth, their demand for U.S. goods (exports from U.S.) increases. As U.S. exports increase while imports remain the same or increase at a slower rate,the difference between exports and imports diminishes, reducing the trade deficit and thus leading to a smaller trade gap.
02

Understanding relation between import decrease and sluggish economic growth

Sluggish economic growth typically implies low levels of disposable income for consumers and low demand from businesses, which in turn decreases the amount of goods and services imported, since there is less consumption or investment. Thus, a decline in imports doesn't necessarily imply it caused the economic slump, it could be a symptom of it.

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