Which of the following statements is correct? The trade...

Name: Problem 5, Chapter 17: Economics
Uploaded: 2022-03-15T13:28:06-08:00
Duration: 1 min 4 s
Channel: Haricharan Gupta
Description: Which of the following statements is correct? The trade surplus equals (a) the government surplus plus the private sector surplus, (b) the government deficit plus the private sector surplus or (c) the government deficit plus the private sector deficit.

Which of the following statements is correct? The trade surplus equals (a) the government surplus plus the private sector surplus, (b) the government deficit plus the private sector surplus or (c) the government deficit plus the private sector deficit.

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Key Concepts

National Income Accounting Identity

This concept states that an economy’s total output (or income) equals the sum of its consumption, investment, government spending, and net exports. In an open economy, this identity links domestic saving and investment decisions with the trade balance, showing how external trade interacts with internal economic activities.

Trade Surplus

The trade surplus is the amount by which the value of a country’s exports exceeds the value of its imports. It represents an inflow of funds from abroad and is a key indicator of an economy’s external sector performance, reflecting a situation where national saving exceeds domestic investment.

Sectoral Balances

Sectoral balances refer to the division of the economy into the private sector and the government sector, where each can have either a surplus or a deficit. The sum of the private sector balance (private saving minus investment) and the government sector balance (taxes minus government spending) equals the trade balance. This decomposition shows that the trade surplus is precisely the sum of the government surplus (or deficit) and the private sector surplus, making the identity valid regardless of whether one sector runs a surplus or a deficit.

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