Question

Does a trade surplus mean an overall inflow of financial capital to an economy, or an overall outflow of financial capital? What about a trade deficit?

a) Surplus: Inflow; Deficit: Outflow
b) Surplus: Outflow; Deficit: Inflow
c) Surplus and Deficit both indicate Inflow
d) Surplus and Deficit both indicate Outflow

Answer 1

A trade surplus indicates a net outflow of financial capital from a country, while a trade deficit indicates a net inflow of financial capital into a country.

Step-by-step explanation:

When we consider the impact of trade balances on financial capital flows, a trade surplus implies a net outflow of financial capital from a domestic economy to other countries. Conversely, a trade deficit indicates a net inflow of financial capital from abroad to the domestic economy. This relationship can be seen in historical economic trends, such as those in the United States during the early 1980s, which experienced large trade surpluses leading to financial capital flowing out of the country to be invested elsewhere. When large trade deficits occurred in the late 1990s and early 2000s, there was a corresponding influx of financial capital into the country.