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Chapter 10: Q. 15 (page 266)

Why does a recession cause a trade deficit to increase?

Short Answer

Expert verified

Due to capital flow from abroad.

Step by step solution

01

Step1. Introduction

Trade deficit essentially signifies the imports exceeding exports. But the cause of a trade deficit is the rate of investment and savings.

02

Step2. Explanation

Trade deficit as explained is caused by when the rates of public and private savings don't match with the domestic investments.

Since the investment is not matched, during recession, capital inflow occurs from abroad to finance this imbalance.


Hence, as a result of this, the trade deficit during recession widens.

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Most popular questions from this chapter

Is it better for your country to be an international

lender or borrower?

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.

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

Some economists warn that the persistent trade

deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.

In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?
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