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Chapter 10: Q 37. (page 267)

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.

Short Answer

Expert verified

This is not true.

Step by step solution

01

Step 1. Definition

A trade deficit is when there are exports less than imports, which is basically the opposite of a trade surplus.

02

Step 2.

When a trade deficit happens, it means that there is a high inflow of capital and high costs as imports exceed exports. Moreover, the US economy mainly invests foreign financial capital in welfare programs.

Thus, a trade deficit in the domestic sector like autos is not because of a lack of competitiveness but because of the inflow of financial capital.

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Most popular questions from this chapter

What three factors will determine whether a nation has a higher or lower share of trade relative to its GDP?

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?

If domestic investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?

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?

If countries reduced trade barriers, would the

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