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Chapter 10: Q. 14 (page 266)

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

Short Answer

Expert verified

Trade deficit should rise.

Step by step solution

01

Step1. Introduction

The savings-investment identity is-

(S-I) = (X-M)

S- Savings

I- Investments

X- Exports

M- Imports

X-M= Trade Balance

02

Step2. Explanation

As their exist a trade deficit, X-M is negative. When domestic investment increases, the S-I shall reduce, further increasing the trade deficit.

This is held true when there is no change in the amount of private and public saving.

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Most popular questions from this chapter

If imports exceed exports, is it a trade deficit or a trade surplus? What about if exports exceed imports?

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

How did large trade deficits hurt the East Asian countries in the mid 1980s? (Recall that trade deficits are equivalent to inflows of financial capital from abroad.)

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

Both the United States and global economies are booming. Will U.S. imports and/or exports increase?
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