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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

Why does a recession cause a trade deficit to increase?

What are the two main sides of the national savings and investment identity?

State whether each of the following events involves a financial flow to the U.S. economy or away from the U.S. economy:

a. Export sales to Germany

b. Returns paid on past U.S. financial investments in Brazil

c. Foreign aid from the U.S. government to Egypt

d. Imported oil from the Russian Federation

e. Japanese investors buying U.S. real estate

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 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?

Will nations that are more involved in foreign

trade tends to have higher trade imbalances, lower trade imbalances, or is the pattern unpredictable?
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