Reposting some of my review questions: 1. Borrowing from abroad represents: Sele

Question

Reposting some of my review questions:

1. Borrowing from abroad represents:

Select one:

a. a capital outflow.

b. a capital inflow.

c. positive net savings.

d. none of the above.

2. When a country's import spending exceeds the value of its exports, the country is experiencing a:

Select one:

a. trade deficit.

b. trade surplus.

c. budget deficit.

d. none of the above.

Answer I recived on chegg below. But now I am confused. I was thinking the answer was Trade Surplus but after reading this i am thinking Trade deficit? Can someone help.

If the value of imports is higher than exports the country experiences a deficit in the trade account.Balance of trade is calculated as the difference between value of exports and imports.If exports is higher than imports country experiences surplus whereras if imports are higher than exports balance of trade is in deficit.

Explanation / Answer

When a country borrows amount from other coutry, money will inflow in the economy. So it is a capital inflow. It will increase fund available in the economy for investment. But it is negative savings as you have to repay it. Thus from the point of trade balance you are importing capital from other country. It will increase import. Balance of trade is adverse is import is more than export. If before this borrowing trade balance was balanced, then it will create a trade defecit.

Answer: Option a is correct.

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