The Japanese economy has the following traits: a. It is very large. b. It has an

Question

The Japanese economy has the following traits:

a. It is very large. b. It has an extremely high savings rate.

c. It has a moderately high rate of investment in physical capital.

d. It has relatively few large economies that are geographically very close to it.

e. It has a tradition of limiting imports.

Based on these traits, would you expect the level of trade of the Japanese economy to be high or low? Which traits are especially relevant in reaching this conclusion? Also based on these traits, would you expect Japan to have trade surpluses or deficits? Which traits are especially relevant in reaching this conclusion

Explanation / Answer

I expect trade level to be high.

The reason is, Japan has very high savings rate, which, coupled with the fact that it is a very large economy, will lead to very high Savings. Compared to that, Investment rate is stated to be not so high. Therefore, (Savings - Investment) is likely to be positive.

Since we know that (Savings - Investment) = Exports - Imports = Trade balance, a high level of (Savings - Investment) will lead to high trade volume.

In addition, I believe Japan will have trade surplus (Exports > Imports). The reason is, imports are limited, but trade volume is high, leaving a large amount of export. As exports exceed imports, trade balance movies toward a surplus.

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