Question

How could a greater fiscal deficit create a greater trade deficit?

Answer 1

• Fiscal deficit can cause a larger trade deficit.
• A deficit occurs due to higher government spending and lower taxes.
• This eventually leads to increase in consumer spending.
• This would also increase inflations and aggregate demands.
• As inflation increases the consumer spendings also increases.
• As a result Imports increases.
• This eventually leads to large trade deficits
• Increase in aggregate demand can also cause inflation which makes the goods relatively uncompetitive.
• Therefore the Imports increases and become more and more attractive
• This is also a contribution to trade deficit.
• Fiscal deficit doesn't cause trade deficit always.
• If a country has more growth in export sectors than fiscal deficit may not necessarily lead to a trade deficit.