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 3 years ago

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