Other things equal, what is the likely impact of a U.S. trade deficit on the current...

Other things equal, what is the likely impact of a U.S. trade deficit on
1. the current account?
2. foreign savings if domestic investment is greater than domestic saving?
3. foreign savings if domestic investment is less than domestic saving?

Expert Solution

Trade deficit implies that imports exceeds exports. A likely impact of U.S trade deficit on current account is that Net Exports NX = Exports(X)- Imports(M) falls ie. NX <0.

Again, NX = S - I. When domestic investment is more than domestic savings, NX is negative implying Trade Deficit. NX <0. The BOP equation can be given as NX + K = 0 where K indicates the capital account. As NX falls, K has to rise. This means there has to be a capital inflow from abroad. As capital flows to the US from abroad, foreign savings fall.

If the domestic investment is less than domestic savings, NX is positive. NX >0. From the BOP equilibrium equation, K has to fall which means there has to be a capital outflow from the domestic country to the foreign country. Consequently, foreign savings increase.

Rahul Sunny answered 2 years ago

what is the impact of trade surplus (exporting more than importing) and trade deficit (importing more...

what is the impact of trade surplus (exporting more than importing) and trade deficit (importing more than exporting) on GDP, employment, and the exchange rate of the country's currency?

Moreover, what is the impact of trade surplus (exporting more than importing) and trade deficit (importing...

Moreover, what is the impact of trade surplus (exporting more than importing) and trade deficit (importing more than exporting) on GDP, employment, and the exchange rate of the country's currency?

The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit.

The chapter notes that the rise in the U.S. trade deficit during the 1980s was due largely to the rise in the U.S. budget deficit. On the other hand, some in the popular press have claimed that the increased trade deficit resulted from decline in the quality of U.S. products relative to foreign products. Assume that U.S. products did decline in relative quality during the 1980s. This caused net exports at any given exchange rate to_______. Indicate the effect of this shift in...

The U.S. is a large economy with a trade deficit. Suppose the U.S. federal government increases...

The U.S. is a large economy with a trade deficit. Suppose the U.S. federal government increases income tax. How will this policy affects the U.S. saving, investment, real interest rate, and capital flows? Is it possible to prevent changes due to this tax policy? If yes, how? Explain reasoning.

Explain the difference between a trade deficit, a current account deficit, and a balance of payments...

Explain the difference between a trade deficit, a current account deficit, and a balance of payments deficit. Explain fully why a current account deficit can be good for a country.

Suppose that aggregate investment is equal to 400, the current account deficit is equal to 80,...

Suppose that aggregate investment is equal to 400, the current account deficit is equal to 80, and the government budget deficit is equal to 50. Private savings must equal . A. 370 B. 360 C. 320 D. 130 2. Suppose the nominal GDP in an economy was 200 million dollars in 2009 and 240 million dollars in 2019. The real GDP in 2019 is 234 million dollars at the 2009 prices. The real GDP in 2009 is 201 million dollars...

Explain how international tourism could assist in reducing the current sizable U.S. trade deficit. How could...

Explain how international tourism could assist in reducing the current sizable U.S. trade deficit. How could it increase the deficit?

Impact of u.s china trade war on supply chains and other external shocks on supply chains

What impact might a decrease in the U.S. federal budget deficit have on interest rates and...

What impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S. dollar? (Assume the exchange rate is stated in terms of foreign currency per U.S. dollar.) A. Interest rates decrease and exchange rates increase. B. Interest rates increase and exchange rates decrease. C. Interest rates and exchange rates decrease. D. Interest rates and exchange rates increase.

4. Other things equal, what effect will each of the following changes independently have on the...

4. Other things equal, what effect will each of the following changes independently have on the equilibrium level of real GDP in the private closed economy? 1. A decline in the real interest rate. 2. An overall decrease in the expected rate of return on investment. 3. A sizable, sustained increase in stock prices. (answer in your own words)

Question