Question

Why does a recession cause a trade deficit to increase?

Short answer

Due to capital flow from abroad.

Step-by-step solution

Step1. Introduction

Trade deficit essentially signifies the imports exceeding exports. But the cause of a trade deficit is the rate of investment and savings.

Step2. Explanation

Trade deficit as explained is caused by when the rates of public and private savings don't match with the domestic investments.

Since the investment is not matched, during recession, capital inflow occurs from abroad to finance this imbalance.

Hence, as a result of this, the trade deficit during recession widens.