Suppose the government is concerned with its large trade deficit. Politician A proposes to encourage consumers...

Suppose the government is concerned with its large trade deficit. Politician A proposes to encourage consumers to buy more domestically produced goods by running "Buy American" marketing campaigns. Politician B proposes to reduce government spending in order to tackle government debt.

A.) How does Politician A's plan affect the trade deficit and why?

B.) How does Politician B's plan affect the trade deficit and why?

C.) Which of these two policy choices, if any, will be effective in reducing the trade deficit in the long run?

Expert Solution

A) In case of politician A - It proposes to encourage consumers to buy more domestically it results in decreses the import of goods and services in domestic country. For payment of importing goods and services more foreign exchange is spended decreases foreign exchange reserves of the country and creates trade deficit .so it was necessary to motivate consumers for purchasing domestic goods.

B) In this case Government spending is reduced. If the Government spending is reduced the liabilities of Government for loans and advances and excess payments of interest on loans are reduced and Government makes funding only in productive activities rather than unnecessary activities.

C) In the long run out of A and B ,option A will be more effective in reducing the trade deficit in the long run.As imports are controlled there is increase in production activities , creates more employment opportunities ,increase in incomes.The main criteria in this policy is that payment for imported goods and services are controlled it increases foreign exchange reserves and ultimately it reduces the trade deficit in the long run.

Rahul Sunny answered 7 months ago

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