CFA CFA Level 1 Current Account example: why increase in savings = decrease in trade deficit?

Econs

Current Account example: why increase in savings = decrease in trade deficit?

  • Author
    Posts
    • Up
      2
      Accepted answer
      ::

      The question is worded in a confusing manner (aren’t they all).

      Decreasing a country’s trade deficit means increasing exports OR reducing imports. (x-m)↑

      Increasing domestic saving relative to domestic investment, (S-I)↑, either means:

      • Increasing domestic savings, which means people are spending less, therefore reducing imports.
      • Reducing domestic investment, which means less capital inflow from abroad.

      All other factors equal, either will result in an increase in the trade balance (x-m).

      The equation you cited also corresponds to this:

      (x-m)= (S-I) + (T-G)

      Where:

      • X=exports
      • M=imports
      • S=domestic saving
      • I=investment spending
      • T=taxes
      • G=government spending

      So if (x-m)↑, (S-I)↑.

Viewing 0 reply threads
  • You must be logged in to reply to this topic.