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Chapter 23: Q. 2 (page 575)

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

Short Answer

Expert verified

Current account balance falls.

Step by step solution

01

Step1. Introduction

When the country's import exceeds its export, there is a trade deficit in the country. It is calculated by subtracting the value of the exported goods from the value of the imported goods.

The current account of a nation shows the value of trade in goods and services along with the flow of income and aid. Balance in current account means that the nation is receiving the same amount of money it is sending.

02

Step2. Explanation

Since, the trade acocunt or trade and goods and services is a component of current account, a trade deficit would mean that the value of current account balance would decline. The country would be receiving less income through exports but would be spending more on imports.

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Most popular questions from this chapter

What are the main components of the national

savings and investment identity?

Does a trade surplus help to guarantee strong economic growth?

In recent decades, has the U.S. trade balance

usually been in deficit, surplus, or balanced?

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?

What is more important, a country’s current account balance or GDP growth? Why?
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