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Chapter 23: Q. 29 (page 576)

Does a trade surplus help to guarantee strong economic growth?

Short Answer

Expert verified

A trade surplus does not help to guarantee strong economic growth .

Step by step solution

01

Step 1. Trade surplus

When a country's economy is in recession, unemployment is high and GDP is low. Consumption is very low in this economy, and exports exceed imports due to a fall in prices of domestic goods. In contrast, these economies' trade surpluses imply that domestic savings exceed domestic investment, and households and firms invest in the rest of the world.

02

Step 2. Reason

Because trade balances can be in surplus during recessions, having a surplus does not ensure economic growth.

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Most popular questions from this chapter

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

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?

Describe a scenario in which a trade surplus benefits an economy and one in which a trade surplus is occurring in an economy that performs poorly. What key factors or factors are making the difference in the outcome that results from a trade surplus?

If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?

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