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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

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

Many think that the size of a trade deficit is due

to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.

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

Occasionally, a government official will argue that

a country should strive for both a trade surplus and a healthy inflow of capital from abroad. Explain why such a statement is economically impossible.

Table 10.7 provides some hypothetical data on

macroeconomic accounts for three countries represented

by A, B, and C and measured in billions of currency

units. In Table 10.7, private household saving is SH,

tax revenue is T, government spending is G, and

investment spending is I.


ABC
SH700500600
T00500500
G600350650
I800400450

Table 10.7 Macroeconomic Accounts

a. Calculate the trade balance and the net inflow of

foreign saving for each country.

b. State whether each one has a trade surplus or

deficit (or balanced trade).

c. State whether each is a net lender or borrower

internationally and explain.
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