Question

Explain the connection between the federal government budget deficit in the early '80s and the accompanying twin foreign trade deficit. Would you expect the same in the current economic situation the country is facing? Explain.

Answer 1

The accompanying twin foreign trade deficit has causation effect upon the federal government budget deficit in early 80s. When trade deficit took place, then imports were more than exports. It caused real output to decrease. As a result, government collected less tax revenues from different sources, though spending did not come down. It led to the creation of budget deficit. So, causation connection can be identified between trade deficit and budget deficit.

In the current economic scenario, the same problem can be faced, but size of the budget deficit will be very high, in comparison to the size of the trade deficit. Since imports and exports, both are going to come down, then trade deficit will be smaller in size. But, due to economic lockdown and economic stimulus of more than $3 Trillion, the spending will be much higher than the tax revenue. So, size of budget deficit is going to be very high.