Question

1. If a country wants to grow its real GDP at 3% per year, then it can do this by growing physical capital per worker at a rate of 3% per year without making any other changes. Explain.

2. A large trade deficit is definitely a sign of a weak economy. Explain.

Answer 1

1. False

This is because there are always diminishing marginal returns to factor inputs present. If a country wants to grow at 3%, it needs to grow its physical capital per worker by more than 3% to accommodate for diminished marginal returns.

2. Not certainly

A large trade deficit means the country is importing more than it is exporting. Such a trade patterns leads to a weakened currency. As currency weakens, imports become expensive and exports become cheaper, leading to an improvement in trade balance and economy stabilizing back again .