Question

What is the difference between the trade and budget deficit? How might an extended budget deficit lead to lower economic growth?

Answer 1

Trade deficit occurs in an economy when the imports exceed the exports in the country. The country will purchase more goods and services from foreign countries. It results in shortage in foreign exchange reserve of a nation. Trade deficit will increase the overall standard of living of people in economy. And also it increases the opportunity for more outsourcing jobs. The people in an economy start buying foreign goods so that the treat of inflation can be reduced to a large extent in an economy.

On the other hand budget deficit is the situation where the revenue of government is comparatively less than its expenses. Here the government spends more by borrowing money from various sources. Budget deficit will increase the government borrowing so the debt goes on increasing. It will negatively affect the growth of the economy in future. It is expressed as a percentage of GDP.

If the Budget deficit is extended it negatively affect the overall economic growth of the country. The government will borrow money from public, financial institution and several other sources. The government spends by collecting money as debt in the situation off budget deficit. Thus the government increases the tax rate in future to collect the fund to pay the interest of government debt. It gradually reduces the purchasing power of people in the economy. The overall demand in the economy decrease and thereby the supply and production also reduces rapidly. Finally the economy’s growth will decreases in the country. Thus it can be said that the extended budget deficit will reduces the growth of the economy. Thus government should reduce the spending when the budget deficit occurs in the country.