Question

Consider the relationship that links the Net National Investment to the savings of different economic sectors. Explain how the federal government budget deficit and the country’s trade deficit are connected.

Answer 1

In a simple way we can understand the relationship between Federal government budget deficit and countrys trade deficit.

Budget deficit means a country is spending (expenditure) more than revenue. On the other hand trade deficit indicates a country is consuming more than its available supply .   

A. Federal government budget deficit - trade deficit

When government increases it's expenditure through tax cut or government spending ( public expenditure), it leads to budget deficit ( total expenditure is greater than total receipts) . As a result of government spending, income of the people will increase which results in huge Aggreate demand in the economy. Existing supply cannot cope up with the increased aggregate demand, government will import goods and services from Abroad. So that import will be greater than export(M>X).This is called trade deficit

Net national investment and saving are interlinked. Saving is converted in to investment. So that they are equal. We can write it as

S=I

Investment creates more employment opportunities,output and growth in the economy. Suppose investment in the economy increases, but there is lack of aggregate demand. In order to solve the aggregate demand deficiency, government reduces tax or increasing public expenditure. It creates budget deficit in the economy. Now AD>AS. So the increased demand problem can not solve with the available supply. So the government  will import (M) products and services from other countries. it leads to trade deficit in the economy