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Chapter 10: Q. 29 (page 266)

Does a trade surplus help to guarantee strong economic growth?

Short Answer

Expert verified

No, not always.

Step by step solution

01

Step1. Introduction

Trade surplus refers to a situation in which the exports exceed imports. Or, in other words domestic savings exceed domestic investments.

02

Step2. Explanation

Trade surplus can guarantee economic growth if it is caused due to increased export (implies improved production and hence demand) or due to reduced imports (implies self reliance of the economy).

Any other reason other than these do not guarantee economic growth.

For instance, if during recession, the domestic demand shall fall and hence the imports. Exports are expected to continue at the same level. This shall lead to a trade surplus but is not good as it is indicative of recession in the economy and not economic growth.

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Most popular questions from this chapter

Imagine that the U.S. economy finds itself in the

following situation: a government budget deficit of \(100 billion, total domestic savings of \)1,500 billion, and total domestic physical capital investment of \(1,600 billion. According to the national saving and investment identity, what will be the current account balance? What will be the current account balance if investment rises by

\)50 billion, while the budget deficit and national savings remain the same?

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

The GDP for the United States is \(18,036billion and its current account balance is -\)484billion. What percent of GDP is the current account balance?

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1% of Germany’s GDP; private savings is 20% of GDP; and physical investment is 18% of GDP.

a. Based on the national saving and investment identity, what is the current account balance?

b. If the government budget surplus falls to zero, how will this affect the current account balance?

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

global financial crises?
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