![]() As The Keynesian Perspective chapter discusses, a net inflow of foreign financial investment always accompanies a trade deficit, while a net outflow of financial investment always accompanies a trade surplus. Government budget balances can affect the trade balance. Fiscal Policy, Investment, and Economic Growthįiscal Policy and the Trade Balance Overview.How Government Borrowing Affects Private Saving.How Government Borrowing Affects Investment and the Trade Balance.Introduction to the Impacts of Government Borrowing.The Use of Mathematics in Principles of Economics.Exchange Rates and International Capital Flows.The Aggregate Demand/Aggregate Supply Model.The International Trade and Capital Flows.Trade deficit may actually be beneficial in the short run since it indicates higher imports due to consumer consumption. “Trade deficit is always harmful to a country’s economy.”Īns: The correct answer is option “b”. Q: Identify whether the following statement is true or false. However, if a country has enough savings and investments, then it can offset its deficit using those savings. We already discussed that a trade deficit isn’t always detrimental. When an economy faces a trade deficit, the balance of savings and investments becomes all the more important. An increase or decrease of savings as against investments, again, has long-term and short-term effects on the economy. Savings should be deposited into intermediaries like banks and financial institutions so that they can be converted into investments for business. This is where the equilibrium comes into play. And during trade deficits, this capital is of utmost importance as it drives economic growth.Īn increase in savings doesn’t always indicate an increase in investments. When savings translate into investments, capital is generated. ![]() According to the Keynes theory, an economy is in equilibrium only when saving is equal to investment. In economic terms, the savings and investments balance (I = S) refers to the balance of national savings and national investments, which is equal to the current account. On the other hand, investments are subject to a certain amount of risk. While savings is the excess income after expenditure, investment is the money earmarked or intended for conversion into capital. ![]() People generally use the term “savings” interchangeably with “investments”. In generic terms, savings refers to money left over after accounting for expenses. Both terms are closely related and important in macroeconomics. Next, let’s look at savings and investments. The dearth of domestic goods and services results in more imports and as a result, more trade deficit. As a result, employees lose jobs and companies manufacture fewer goods and services. Consequently, domestic companies are not able to manufacture and produce goods at such low prices. When imports increase beyond a certain extent, prices of goods and services reduce due to high competition. And that’s where a healthy balance of imports and exports is required. However, a trade deficit, in the long run, may not be beneficial. And a growing economy attracts more foreign investment. In such a case, an increase in imports indicates a fast, growing economy. And a market with a wide variety of both domestic and imported goods provides the element of choice to the consumers. With domestic products available at lower prices, the inflation rate decreases. In such a case, a trade deficit then provides opportunities for domestic businesses to produce quality goods and services to match foreign products. Imports also increase when the consumers’ purchasing power increases to create a demand for expensive foreign products. When do imports increase? They increase when a country’s production of domestic goods and services is not enough to meet the local demand. However, it is not exactly harmful to the economy. So trade deficit represents a negative balance of trade. A trade surplus, on the other hand, occurs when a country’s total exports outweigh its imports. A trade deficit occurs when a country’s total imports exceed its exports. But there are times when the balance of trade tilts towards a trade surplus or a deficit. And a country’s savings and investments play an important role in maintaining this balance. ![]() ![]() A healthy balance of trade plays an important role in sustaining the economy of a country. ![]()
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