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Chapter 23: Q. 13 (page 576)

What determines the size of a country’s trade deficit?

Short Answer

Expert verified

The amount of private and state savings, as well as domestic investment, determines a country's trade imbalance.

Step by step solution

01

Step 1. Trade deficit

When a country's imports surpass its exports during a specific time period, it has a trade imbalance.

02

Step 2. Explanation

A country's trade deficit is determined by the quantity of private and public savings, as well as domestic investment.

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Most popular questions from this chapter

Why does a recession cause a trade deficit to increase?

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 the trade deficit of the United States increases, how is the current account balance affected?

Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of \(100 billion, total domestic savings of \)1,500 billion, and total domestic physical capital investment of \(1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by \)50 billion, while the budget deficit and national savings remain the same?

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