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Chapter 10: Problem 38

If you observed a country with a rapidly growing trade surplus over a period of a year or so, would you be more likely to believe that the country's economy was in a period of recession or of rapid growth? Explain.

Short Answer

Expert verified
In the given scenario of a rapidly growing trade surplus, it is more likely that the country is experiencing a period of recession. During a recession, imports often decrease at a faster rate than exports, leading to a significant trade surplus. Additionally, factors such as currency depreciation and government policies might contribute to the trade surplus growth. On the other hand, during rapid economic growth, both exports and imports are likely to rise, resulting in a slower growth of the trade surplus.

Step by step solution

01

A trade surplus occurs when a country's exports exceed its imports. In other words, it is when a nation sells more goods and services to other countries than it buys from them. This can be a sign of economic strength or weakness, depending on other factors. #Step 2: Economic growth and Trade Surplus#

Economic growth occurs when a country's production of goods and services, measured by Gross Domestic Product (GDP), increases over time. During periods of economic growth, countries generally experience higher levels of employment, increased consumer spending, and strong business investment. These factors can contribute to an increase in both exports and imports, but the relationship between growth and trade surplus is not always straightforward. #Step 3: Recession and Trade Surplus#
02

A recession is a period of economic decline, characterized by falling GDP, high unemployment, and reduced consumer and business spending. During a recession, demand for a country's exports may decrease as other nations are also experiencing economic slowdowns. However, a country can also experience a trade surplus during a recession if its imports decrease at a faster rate than its exports. #Step 4: Factors affecting Trade Surplus#

Several factors can cause a trade surplus to increase, including: 1. An increase in demand for the country's exports due to innovation, improved quality, or competitive pricing. 2. Currency depreciation, making exports more attractive to foreign buyers and imports more expensive for domestic consumers. 3. Government policies, such as trade barriers or subsidies, favoring domestic industries and exports. 4. Reduced consumer and business spending during a recession, leading to lower imports. #Step 5: Analyzing the given scenario#
03

In the given scenario, there is a rapidly growing trade surplus over a year or so. To determine whether this is more likely to occur during a period of recession or rapid growth, we must consider the factors listed in Step 4. #Step 6: Conclusion and Explanation#

Based on our analysis, it is more likely that a country with a rapidly growing trade surplus is experiencing a period of recession. The reason for this is that, during a recession, imports are likely to decrease at a faster rate than exports, resulting in a significant trade surplus. On the other hand, during a period of rapid economic growth, although exports may increase, imports are also likely to rise, making the trade surplus grow at a slower rate. Additionally, currency depreciation and government policies to stimulate the economy during a recession might further contribute to the growth of the trade surplus.

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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?

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

Table 10.7 provides some hypothetical data on macroeconomic accounts for three countries represented by A, B, and C and measured in billions of currency units. In Table \(10.7,\) private household saving is \(\mathrm{SH}\), tax revenue is \(\mathrm{T},\) government spending is \(\mathrm{G},\) and investment spending is I. $$\begin{array}{l|l|l|l}\hline {} & {\text { A }} & {\text { B }} & {\text { C }} \\\\\hline \text { SH } & 700 & 500 & 600 \\\\\hline \text { T } & 00 & 500 & 500 \\\\\hline \text { G } & 600 & 350 & 650 \\\\\hline \text { I } & 800 & 400 & 450 \\\\\hline\end{array}$$ a. Calculate the trade balance and the net inflow of foreign saving for each country. b. State whether each one has a trade surplus or deficit (or balanced trade). c. State whether each is a net lender or borrower internationally and explain.

In \(2001,\) the United Kingdom's economy exported goods worth \(£ 192\) billion and services worth another \(£ 77\) billion. It imported goods worth \(£ 225\) billion and services worth \(£ 66\) billion. Receipts of income from abroad were \(£ 140\) billion while income payments going abroad were \(£ 131\) billion. Government transfers from the United Kingdom to the rest of the world were \(£ 23\) billion, while various U.K government agencies received payments of \(£ 16\) billion from the rest of the world. a. Calculate the U.K. merchandise trade deficit for 2001. b. Calculate the current account balance for 2001. c. Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001.

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of \(1 \%\) of Germany's GDP; private savings is \(20 \%\) of \(\mathrm{GDP} ;\) and physical investment is \(18 \%\) of GDP. a. Based on the national saving and investment identity, what is the current account balance? b. If the government budget surplus falls to zero, how will this affect the current account balance?
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