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Chapter 10: Q. 25 (page 266)

Does a trade surplus mean an overall inflow of financial capital to an economy, or an overall outflow of financial capital? What about a trade deficit?

Short Answer

Expert verified

Overall inflow for surplus and outflow for deficit.

Step by step solution

01

Step1. Introduction

Trade deficit is a situation when imports exceed exports.

Trade surplus is a situation when exports exceed imports.

Balanced trade is a situation when exports and imports are equal.

02

Step2. Explanation

In trade surplus, it implies export exceed imports. Export means selling of goods and services outside the country. As goods are sold, money flows in. Hence, trade surplus is a situation of overall inflow of financial capital.

Similarly, trade deficit means imports are more, i.e. purchasing. So, money will flow out. Hence, trade deficit is a situation of overall outflow of financial capital.

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Most popular questions from this chapter

When is a trade deficit likely to work out well for an economy? When is it likely to work out poorly?

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

Is it better for your country to be an international

lender or borrower?

If a country is a big exporter, is it more exposed to

global financial crises?

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.
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