Question

If you observed a country with a rapidly growing trade surplus over a period of a year or so, would you be more likely to believe that the country's economy was in a period of recession or of rapid growth? Explain.

Short answer

If a country is observed with a rapidly growing trade surplus over a period of a year or so, it would be more likely to believe that the country's economy was in a period of recession.

Step-by-step solution

Step 1. Trade balance

If a country has a significant trade surplus, it is more likely that the economy is in recession. When a country's economy is in recession, unemployment is high and GDP is low. Consumption is very low in this economy, and exports outnumber imports due to a drop in the price of domestic goods. As a result, the trade balance is positive.

Step 2. Explanation

As a result, a drop in price due to the recession may attract buyers from other countries, resulting in an increase in exports and a positive trade balance. As a result, a trade surplus does not indicate strong economic growth.