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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

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

What are the main components of the national savings and investment identity?

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.

If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?

Explain the relationship between a current account deficit or surplus and the flow of funds.
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