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Chapter 10: Q. 13 (page 266)

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

Short Answer

Expert verified

Size of Imports, exports, savings and spending.

Step by step solution

01

Step1. Introduction

Trade deficit refers to the country's trade balance when the imports of the country exceed the exports of the country.

02

Step2. Explanation

Trade deficit is the difference of exports and imports in a scenario when the imports exceed exports.

As the definition suggests, it is the size of exports and imports which shall determine the size of trade deficit.

Larger the size of imports, larger will be trade deficit and vice versa.
Smaller the size of exports, larger will be trade deficit and vice versa.

Size of saving increases, smaller will be trade deficit and vice versa.

Size of investment increases, larger will be trade deficit and vice versa.

These relations are based on savings-investment identity.

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Most popular questions from this chapter

Is it better for your country to be an international

lender or borrower?

Using the national savings and investment identity, explain how each of the following changes (ceteris paribus) will increase or decrease the trade balance:

a. A lower domestic savings rate

b. The government changes from running a budget surplus to running a budget deficit

c. The rate of domestic investment surges

Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.

a. Living in an especially large country

b. Having a domestic investment rate much higher than the domestic savings rate

c. Having many other large economies geographically nearby

d. Having an especially large budget deficit

e. Having countries with a tradition of strong protectionist legislation shutting out imports

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.

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.
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