Final answer:
Economists have confirmed the close connection between trade balances and international financial capital flows, with trade surpluses and deficits being intricately linked to investment and savings movements across borders.
Step-by-step explanation:
Economists have indeed observed a close connection between trade balances and international flows of financial capital. The balance of trade, which includes the surplus or deficit in goods and services, is inherently linked to the movement of financial capital across borders. A trade surplus usually corresponds to an inflow of financial capital, whereas a trade deficit often reflects an outflow.
This connection can be illustrated through a circular flow diagram, which shows how money circulates through an economy, including international trade and capital flows. For instance, when a country runs a trade surplus, it exports more than it imports, and the foreign buyers often finance these purchases by investing in the surplus country's economy. Conversely, a trade deficit means a country buys more from abroad than it sells; thus, it must attract foreign capital to finance these purchases.
Whether trade surpluses or deficits are beneficial or harmful depends on various economic conditions and circumstances. For example, trade surpluses, such as those in Germany, might indicate a strong exporting sector. However, trade deficits, like those in the United States, may not necessarily be detrimental if they are driven by investment opportunities that lead to future growth.