Question

The figure that results when goods imports are subtracted from goods exports is a. the capital account balance. b. the balance of trade. c. the current account balance. d. always less than zero.

Short answer

The figure that results when goods imports are subtracted from goods exports is known as the Balance of Trade, making option (b) the correct answer.

Step-by-step solution

Understand the question

The question asks for the figure that results when goods imports are subtracted from goods exports. We will analyze each option and determine which one is the correct answer.

Analyze Option a: The Capital Account Balance

The capital account balance is a summary of a country's financial transactions, such as investment and borrowing, with other countries. It does not involve goods imports and exports, so option (a) is not the correct answer.

Analyze Option b: The Balance of Trade

The balance of trade is the difference between a country's goods exports and goods imports. Mathematically, it can be represented as: Balance of Trade = Goods Exports - Goods Imports This option aligns with the question, making option (b) the correct answer.

Analyze Option c: The Current Account Balance

The current account balance is a measure of a country's international transactions, which includes not only the balance of trade but also income flows from investments and transfers, such as remittances. While the current account balance does include the balance of trade, it is not solely based on goods imports and exports. Option (c) is not the correct answer.

Analyze Option d: Always Less Than Zero

The statement that the figure is always less than zero implies that the balance discussed here would consistently be negative, indicating a trade deficit. This is not necessarily the case, as there can be situations where a country has a trade surplus or balanced trade, leading to a non-negative subtracted figure. Hence, option (d) is not the correct answer.

Conclusion

In conclusion, the figure that results when goods imports are subtracted from goods exports is known as the Balance of Trade, making option (b) the correct answer.

Key concepts

Capital Account Balance

The capital account balance reflects the financial transactions between countries, excluding goods and services. It's one part of a country's balance of payments, alongside the current account. When we talk about the capital account, we refer to:

• Investments in foreign enterprises
• Loans and borrowings from other countries
• Transfers of asset ownership, such as real estate

This account does not directly involve trade in goods but focuses more on the movement of funds and investments. It's important to understand that changes in ownership of national assets are part of the capital account, distinguishing it from the current and balance of trade accounts. When a country receives more financial inflows than outflows, it has a positive capital account balance, which can indicate foreign investment confidence.

Current Account Balance

The current account balance offers a broader overview of a country's economic transactions with the rest of the world. Unlike the capital account, it includes goods, services, income flows, and transfers. Essentially, it comprises:

• The balance of trade (exports minus imports of goods and services)
• Net income from abroad, such as dividends and interest
• Net current transfers, like foreign aid and remittances

A positive current account balance suggests that a nation is a net lender to the world, earning more from its international transactions than it spends. Conversely, a negative balance indicates a net borrower status. This balance provides significant insights into a country's economic health and its ability to pay foreign debts.

Trade Deficit

A trade deficit occurs when a country imports more goods and services than it exports. This situation results in a negative balance of trade. Key characteristics of a trade deficit:

• It implies that more money is flowing out of the country for foreign goods and services than is coming in from exports.
• It may indicate a country's dependency on foreign products or a strong domestic demand that outpaces its own production.
• While often seen as a negative indicator, trade deficits are not inherently "bad." They can reflect consumer confidence and investment opportunities in a growing economy. However, persistent deficits could signify underlying economic issues that need addressing.

Trade Surplus

A trade surplus occurs when a country exports more than it imports, resulting in a positive balance of trade. This opposite of a trade deficit reflects that:

• There's more money coming into the country from exports than going out for imports.
• It may suggest a strong, competitive economy capable of producing goods and services that are in demand globally.
• Usually perceived as favorable, a trade surplus can boost a nation's GDP and strengthen its currency.

However, it's important to note a persistent surplus can lead to trade tensions with other countries, as seen in the global economic relationships of the past. It sometimes forces trading partners to reconsider trade policies or currency valuations.