Question

What do international flows of capital have to do with trade imbalances?

Short answer

Trade surplus means an outflow of capital to international market, while trade deficit implies inflow of capital

Step-by-step solution

Step 1. Introduction

Balance of trade refers to the value of trade in and out of the economy. Imbalances in trade can be of two types. When the ifnlow of trade is greater than outflow, the trade balance is said to be in deficit. When the outflow is greater than the inflow, the trade balance is said to be in surplus.

Step 2. Explanation

Trade imbalances can either be a trade surplus or a trade deficit. The flow of goods and services and the flow of capital are closely related. Inflows of capital received from abroad can be used to pay for imports of products. So an increase in capital inflow may lead to a trade deficit by boosting imports. Similarly, a trade surplus means that there is an outflow of capital from the domestic economy.