Question

If domestic investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?

Short answer

Trade deficit should rise.

Step-by-step solution

Step1. Introduction

The savings-investment identity is-

(S-I) = (X-M)

S- Savings

I- Investments

X- Exports

M- Imports

X-M= Trade Balance

Step2. Explanation

As their exist a trade deficit, X-M is negative. When domestic investment increases, the S-I shall reduce, further increasing the trade deficit.

This is held true when there is no change in the amount of private and public saving.