Answer to Question #100164 in Macroeconomics for Tiffany

Question

2. The U.S. economy experienced large trade deficits in the 1980s and 1990s and tremendous economic growth in the mid- and late-1990s.
a. Trade deficits have an effect on inflation. Explain the relationship between trade deficits and investment verbally and mathematically using the concept of the balance of payments.
Answer:

Answer 1

a. Trade deficit provides opportunities for domestic businesses to produce quality goods and services to match foreign products. With domestic products available at lower prices, the inflation rate decreases. And a market with a wide variety of both domestic and imported goods provides the element of choice to the consumers. In such a case, an increase in imports indicates a fast, growing economy. And a growing economy attracts more foreign investment