Question

Suppose the economy of the large country of Hendrix is currently experiencing economic growth and has a trade deficit. Consider the possible effects of this economic growth on the trade balance and place them in the appropriate category. Match the followings.

a. Likely to occur during economic growth and increase the trade deficit.
b. Likely to occur during economic growth and decrease the trade deficit.
c. Not likely to occur during economic growth

1. [imports decrease]
2. [domestic private investment increases]
3. [government borrowing decreases]
4. [government borrowing increases]
5. [private savings decrease]
6. [domestic private investment decreases]
7. [private savings increase]
8. [imports increase]

Answer 1

Likely to occur during economic growth and increase the trade deficit.

1. Domestic private investment increases

2. Imports increase

When there is a period of economic growth, people generally have more income in the economy. Their consumption will increase and they will demand more foreign goods as well as domestic. This will lead to imports rising.

Likely to occur during economic growth and decrease the trade deficit.

1. Private saving increase.

2. Government borrowing decrease

With people earning more income, they will be able to save more of that income and because they are not buying with those savings, trade deficit drops.

The government would also not have to borrow as much to prop up the economy as the economy is also doing well. This means less need for foreign funds so a lower trade deficit ensues.

Not likely to occur during economic growth.

1. Imports decrease.

2. Government borrowing increases.

When there is economic growth, it is unusual to see that imports are decreasing.

Government would also not have to borrow as much as the economy is doing well on its own and does not need the government to pump money into it.