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Chapter 23: Q. 40 (page 577)

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

Short Answer

Expert verified

GDP Growth.

Step by step solution

01

Step1. Introduction

Gross domestic product refers to the value of all the finished goods and services manufactured in a fixed time period.

02

Step2. Explanation

GDP represents the health of an economy and hence, it is more important. Higher GDP means improvement in the economy, high employment, higher rates of wages. Whereas when GDP value is low, complete opposite conditions shall prevail in the economy.

The current account balance tells us that the economy is in trade surplus or trade deficit but it doesn’t talk about the health of the economy. So that’s why GDP growth is comparatively more important than the current account balance.

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Most popular questions from this chapter

What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?

The GDP for the United States is \(18,036 billion and its current account balance is –\)484 billion. What percent of GDP is the current account balance?

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?

Some economists warn that the persistent trade deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.

If domestic investment increases, and there is no change in the amount of private and public savings, what must happen to the size of the trade deficit?
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