Final answer:
It is indeed possible for a country to maintain both a trade surplus and a healthy inflow of foreign capital. However, this requires a strategic balance between economic policies that foster exports and those that attract foreign investment. Inflows of foreign capital can take on various forms, including direct investment or portfolio investment, and must be managed to ensure long-term economic sustainability.
Step-by-step explanation:
A government official's argument that a country should aim for both a trade surplus and a healthy inflow of capital from abroad is possible, but it requires a balance of various economic activities. A trade surplus occurs when a country exports more than it imports, which can lead to an accrual of foreign currency reserves. In contrast, a healthy inflow of capital signifies that foreign investors find the domestic market attractive and are willing to invest in the country's assets, a concept often linked with foreign direct investment (FDI) or portfolio investment.
When a country has a trade deficit, it implies a higher demand for foreign currency to pay for imports than what is earned through exports. This situation would typically lead to an increase in the net inflow of foreign financial capital, which can stabilize the currency and finance the trade deficit. This inflow can be facilitated through borrowing from abroad, attracting foreign investment, or through other means. Moreover, capital inflow can contribute to capital deepening, which enhances productivity by increasing the stock of capital per worker when invested in domestic projects. However, if the inflow is primarily driven by borrowing to finance consumption rather than investment, it may not result in economic growth and might lead to capital flight in the long term.