Resolved: Fiscal balance vs trade balance

Question

I find counterintuitive that to improve a fiscal deficit one has to increase on trade deficit and I cannot find a plausible sense to get my head arround it. do you have a concrete example on this?

I do understand that mathematically it can work well because of the negative sign before the trade balance but in actual sense I cannot convince myself how this can practically make sense.

Thanks

Answer 1

Hi Bica,

let's say this is not the one way to improve a fiscal deficit, but both are interrelated.

One way to understand the connection between budget deficits and trade deficits is that when the Government creates a budget deficit with some combination of tax cuts or spending increases, it will increase aggregate demand in the economy. Some of that increase in aggregate demand will result in a higher level of imports, right? Then, a higher level of imports, with exports remaining fixed, will cause a larger trade deficit.

I hope this makes sense.

Best,

365 Team

Resolved: Fiscal balance vs trade balance

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