Chapter 6, Problem 1QQ

To determine

The effect of nation running a trade deficit.

Answer to Problem 1QQ

Option ‘a’ is the correct answer.

Explanation of Solution

Option (a):

When a nation runs a trade deficit, it experiences a capital inflow. The lower savings or increasing investment lead to trade deficits and this implies domestic investment exceeds the savings by resulting in a capital inflow. Thus, option (a) is correct.

Option (b):

The lower savings or increasing investment leads to trade deficits. This implies the domestic investment exceeds the savings and not the reverse. Thus option (b) is incorrect.

Option (c):

Trade deficit implies the increasing investment and lower savings. This implies a decreasing output. Because trade deficit means the nation is not producing enough goods for its residents. Thus, option (c) is incorrect.

Option (d):

The lower savings or increasing investment lead to trade deficits, this implies domestic investment exceeds the savings by resulting in a capital inflow. Trade deficits result in a reduction in the capital outflow as well as the output. Thus, option (d) is incorrect.

Economics Concept Introduction

Trade deficit: Trade deficit is the situation where the country imports goods and services more than what they export. It is the situation of the negative trade balance which means that the outflow of capital as payments to the imports is higher than the inflow of capital as revenue for the exports.

Trade surplus: Trade surplus is take place when the value of a country's exports is greater than the value of its imports.

Capital outflow: The capital outflow occurs when the country purchases the foreign goods, services, and assets.

Capital inflow: The capital inflow occurs when the foreign country purchases the domestic goods, services, and assets.