Chapter 10: Q 37. (page 267)
Many think that the size of a trade deficit is due
to a lack of competitiveness of domestic sectors, such as autos. Explain why this is not true.
This is not true.
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What is more important, a country’s current
account balance or GDP growth? Why?
For each of the following, indicate which type of government spending would justify a budget deficit and which would not.
a. Increased federal spending on Medicare
b. Increased spending on education
c. Increased spending on the space program
d. Increased spending on airports and air traffic control
A government official announces a new policy.
The country wishes to eliminate its trade deficit, but will strongly encourage financial investment from foreign firms. Explain why such a statement is contradictory.
Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy.
a. Living in an especially large country
b. Having a domestic investment rate much higher than the domestic savings rate
c. Having many other large economies geographically nearby
d. Having an especially large budget deficit
e. Having countries with a tradition of strong protectionist legislation shutting out imports
How does the bottom portion of Figure 10.3, showing the international flow of investments and capital, differ from the upper portion?
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