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When a country experiences a trade deficit, which of these helps in the process of capital deepening?

a) Increased exports
b) Lower interest rates
c) Increased government spending
d) Foreign direct investment

User Jovanna
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1 Answer

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Final answer:

Foreign direct investment can help in the process of capital deepening during a trade deficit as it usually increases the amount of physical or human capital per person in an economy.

Step-by-step explanation:

When a country experiences a trade deficit, one element that can help in the process of capital deepening is foreign direct investment (FDI). FDI refers to investments made by a company or individual in one country into business interests located in another country. As it relates to the options provided in the question, lower interest rates, increased government spending, or increased exports do not directly contribute to capital deepening, which is the increase in the amount of capital per person in an economy. Instead, foreign direct investment often leads to an increase in physical capital, such as factories and machinery, and potentially enhances human capital, thus contributing to capital deepening. It is worth noting that increased government spending could indirectly promote capital deepening if it is targeted towards education or other sectors that enhance human capital.

User EelkeSpaak
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