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Chapter 21: Q8. (page 451)

If the economy booms in the United States while going into recession in other countries, the US trade deficit will tend to ________.

a. increase

b. decrease

c. remains the same

Short Answer

Expert verified

The correct option is option (a): increase.

Step by step solution

01

Uneven economic growth and trade deficit 

A trade deficit occurs when the imports of goods or services are greater than exports.

When trading partners experience uneven economic growth, there is a deficit in imports in those countries which experience recession. The financial activities slow down in these countries, and the purchasing power of the people decreases.

02

Trade deficit in boom

When the US economy experiences a boom and the purchasing power of the people in the country improves, import increases. However, the trading partner experiences recession and the purchasing power of the people in these countries deteriorate. Consequently, imports in these countries decrease.

Thus, the net effect due to the economic boom in the US and recession in other countries is an increase in imports and a decrease in exports from the US.

The trade deficit will tend to increase.

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Most popular questions from this chapter

Suppose that the current Canadian dollar (CAD) to U.S. dollar exchange rate is \(0.85 CAD = \)1 U.S. and that the U.S. dollar price of an iPhone is \(300. What is the Canadian dollar price of an iPhone? Next, suppose that the CAD to U.S. dollar exchange rate moves to \)0.96 CAD = $1 U.S. What is the new Canadian dollar price of an iPhone? Other things equal, would you expect Canada to import more or fewer iPhones at the new exchange rate? Explain.

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Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit. Other things equal, are its official reserves increasing, decreasing, or staying the same? If it decides to engage in a currency intervention to reduce the size of its current account deficit, will it buy or sell its own currency? As it does so, will its official reserves of foreign currencies get larger or smaller?
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