Final answer:
An increase in domestic savings leads to a decrease in trade deficit, whereas government borrowing and a boost in domestic investment tend to increase the trade deficit. An economic recession improves the trade balance while a boom has the opposite effect.
Step-by-step explanation:
Classifying Events Affecting Trade Deficit
In evaluating the direct effects of specific events on a country's trade deficit, we can establish a basic understanding of the relationship between savings, investment, and the trade balance. If domestic savings increase without any other changes, the trade deficit would decrease because the economy would be using more domestic capital. Conversely, if the government starts borrowing rather than saving, it will lead to an increase in the trade deficit as this will mean the country is no longer providing enough savings on its own, thus requiring more investment funds from abroad. A surge in the rate of domestic investment would also increase the trade deficit, assuming all else remains equal (ceteris paribus), since additional capital would need to be sourced from international markets to support this investment.
During a recession, the trade balance tends to improve (trade surplus increases or trade deficit decreases) due to decreased demand for imports, whereas an economic boom tends to yield the opposite effect, potentially increasing the trade deficit as consumer and business demand for imported goods and services expands.