Question

1. At a family gathering, one of your cousins says, “We spend so much more on imports than other countries spend on our exports. It isn’t fair, and we should raise tariffs on imports to reduce how much we buy from other countries.”

How might you explain to your cousin that current account deficits aren’t necessarily a sign of economic troubles to come?

Contrary to common belief, the current account deficit does not suggest that we are living beyond our means.

The flip side of the current account deficit is a financial account surplus, which could enhance future growth if the foreign spending it entails is directed toward high-quality investments.

Our current account deficits mean we obtain cheaper goods than we could otherwise.

Most economists agree that an unequal bilateral trade balance is nothing to worry about.

2. The government of a country with a trade surplus is

a demander of financial capital if a budget deficit exists.

a supplier of financial capital if the growth rate is positive.

a demander of financial capital if the government is a democracy.

always a supplier of financial capital.

always a demander of financial capital.

Answer 1

1.  Our current account deficits mean we obtain cheaper goods than we could otherwise.

reason: A country imports a good when the opportunity cost of producing it is more than in another country. It is economically wise to produce a good that has low opportunity cost in surplus and export it to countries that have to produce at a higher opportunity cost. This is the basis of international trade. So, if we were to domestically produce the goods that we import, we would have to do so at a higher opportunity cost. Importing them is cheaper.

2. a demander of financial capital if a budget deficit exists.

reason: Trade surplus indicates that the country's exports are more than its imports. To produce more goods, the country must borrow more money and expand its production capacity. This leads to budget deficit. In fact, budget deficit indicates the extent of financial borrowing of a country.