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Chapter 23: Q. 42 (page 577)

Some economists warn that the persistent trade deficits and a negative current account balance that the United States has run will be a problem in the long run. Do you agree or not? Explain your answer.

Short Answer

Expert verified

It will depend upon various factors.

Step by step solution

01

Step1. Introduction

The trade deficit is a term that is used to define that a country's exports are less as compared to imports.

02

Step2. Explanation

The trade balance is in deficit when domestic investment exceeds domestic savings and the financial capital flow is from foreign to one’s country. But this is not bad for the economy as in the long term this will increase future income and investments in the economy.

But if a country is facing a trade deficit with the budget deficit, then there the problem will arise because of no money for investment.

When there is a trade deficit which leads to the flow of domestic currency to other country and here the country becomes a borrower which is not beneficial for the country.

So, the trade deficit is a long-run problem. A large trade deficit with a negative current account balance will become a problem for the US in long run.

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Most popular questions from this chapter

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?

What is the difference between trade deficits and balance of trade?

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.

How does the bottom portion of Figure 23.3, showing the international flow of investments and capital, differ from the upper portion?

In 2001, the United Kingdom's economy exported goods worth £192 billion and services worth another £77 billion. It imported goods worth £225 billion and services worth £66 billion. Receipts of income from abroad were £140 billion while income payments going abroad were £131 billion. Government transfers from the United Kingdom to the rest of the world were £23 billion, while various U.K government agencies received payments of £16 billion from the rest of the world.

a. Calculate the U.K. merchandise trade deficit for 2001.

b. Calculate the current account balance for 2001.

c. Explain how you decided whether payments on foreign investment and government transfers counted on the positive or the negative side of the current account balance for the United Kingdom in 2001.
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