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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

Why does a recession cause a trade deficit to increase?

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

global financial crises?

A government official announces a new policy.

The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is contradictory.

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

What is more important, a country’s current

account balance or GDP growth? Why?
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