3. Understanding the trade deficit through the fundamental equation The equilibr

Question

3. Understanding the trade deficit through the fundamental equation

The equilibrium condition for GDP in an open economy is:

GDP can be either (spent or taxed away/ spent or saved/ spent, saved, or taxed away/ saved or taxed away) , so it is necessary that:

Y= (C+S/ C+S+T/ S+T/ C+T)

Substituting the second equation into the first equation and rearranging yields:

The fundamental equation shows that an increase in the government expenditures will cause the budget deficit to (increase/decrease) , which should (increase/reduce) the trade deficit.

Explanation / Answer

GDP can be either (spent, saved, or taxed away) , so it is necessary that:

X-M=(S-I_-(G-T)
Y=C+S+T
C+S+T=C+I+G+(X-M)
X-M=S+T-I-G
X-M=(S-I_-(G-T)

the fundamental equation shows that an increase in the government expenditures will cause the budget deficit to (increase) , which should (increase) the trade deficit.

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