Other things equal, which of the following is most likely to decrease a country’s trade deficit ?
a. increase its capital account surplus
b. decrease expenditures relative to income
c. decrease domestic saving relative to domestic investment
Hi, why is the answer A ?
Country’s trade deficit = Imports greater than Exports → I-X = Capital account
Formula : CA + FA + KA = 0
CA = -FA -KA
Trade deficit = -CA = FA + KA
As the question wants to decrease trade deficit, so :
CA = -FA + -KA
b. decrease expenditures relative to income ( FA = -) so it satisfies CA = -FA -KA
c. decrease domestic saving relative to domestic investment (KA = -) so it satisfies CA = -FA-KA
Please help ! i really have trouble understanding trade deficit :’(
Thankyou in advance! 