Question

Explain why and how net exports and net capital flow are related to each other.

Does trade deficit necessarily create trouble for a county’s economic growth? Discuss.

Answer 1

1. Net exports are the value of exports from a country minus the amount of its imports, often referred to as trade balance. Net capital outflow is the domestic residents purchasing foreign assets minus the foreigners buying domestic assets. Net exports equal net outflow of capital.

2. In the simplest sense, a trade deficit exists when a nation imports more than it exports. A trade deficit is neither necessarily exclusively good nor bad. A trade deficit may be a symbol of a healthy economy and can lead to greater economic growth in the future for the deficit-run country under some circumstances