Question

Since the early 1990 s our trade deficit has \(\rightarrow(1.03)\) a) fallen substantially c) risen slightly b) fallen slightly d) risen substantially

Short answer

Since the multiplier is \(1.03\), which is greater than 1 but close to it, the trade deficit has increased by a small magnitude. Thus, the correct answer is c) risen slightly.

Step-by-step solution

Identify the change in the trade deficit from the multiplier

The multiplier is given as \(\rightarrow1.03\). Since the value is greater than 1, it indicates an increase in the trade deficit.

Determine the magnitude of the change

The multiplier is close to 1, so the increase in the trade deficit is minimal. Thus, the magnitude of the change is small.

Choose the appropriate answer

Given the information above, we can conclude that the trade deficit has risen slightly. Therefore, the correct answer is: c) risen slightly

Key concepts

Economic Indicators

Economic indicators are vital statistics that help gauge the health of an economy. These indicators can signal changes in economic policy or trends in economic performance. Key examples include inflation rates, unemployment figures, and GDP growth. These measures help governments, economists, and businesses make informed decisions.

In the case of international trade, the trade deficit is an important economic indicator. It shows the balance between what a country imports versus what it exports. A trade deficit occurs when a country imports more than it exports. This can influence currency values and economic policy decisions.

Understanding these indicators aids in predicting economic trends and making strategic decisions in business and policy planning. Analyzing these trends over time helps identify whether deficits are improving or worsening and how they affect the country’s economy.

Multiplier Effect

The multiplier effect demonstrates how an initial change in economic activity can trigger further economic impact. This concept is crucial in understanding how expenditures and income circulate within an economy.

For example, when government spending increases, it can raise income levels, prompting individuals to spend more, further boosting the economy. This ripple effect shows how one dollar of government spending could potentially generate more than one dollar of economic activity.

In relation to a trade deficit, the multiplier effect suggests that changes in trade balance can have broader implications on the overall economy. A slightly increased trade deficit, as indicated by a multiplier close to 1.03, hints at a small increase in economic activity triggered by higher imports compared to exports. Understanding the multiplier effect provides insight into how changes in international trade can influence domestic economic stability.

International Trade

International trade involves the exchange of goods and services across borders, allowing countries to obtain goods they do not produce domestically. This activity is crucial in integrating global economies and is vital for economic growth.

Trade involves principles of comparative advantage, where countries specialize in producing goods they can create efficiently, and import others they cannot produce as effectively. This boosts global productivity and benefits all trading parties involved.

However, international trade can lead to trade deficits if a country imports significantly more than it exports. While some deficits are manageable, persistent or large deficits might lead to economic concerns. In studying trade deficits, it helps to analyze how these imbalances can affect national economic goals, exchange rates, and international relations. Overall, international trade is a key factor in promoting sustainable economic development, provided it is balanced with strategic trade policies.