Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
A trade deficit always leads to a surplus in the current account.
B
A trade deficit combined with a positive net income from abroad can still result in a current account deficit.
C
A trade deficit is irrelevant to the current account if net income from abroad is negative.
D
A trade deficit and a high net income from abroad will always balance each other out.
Understanding the Answer
Let's break down why this is correct
Answer
A country's current account balance shows how much money it earns from trade and other sources compared to how much it spends. When a country has a trade deficit, it means it is importing more goods and services than it is exporting, leading to more money flowing out than in. However, net income from abroad, which includes things like investments and remittances, can help balance this out. For example, if a country imports $100 million more than it exports but earns $50 million from investments overseas, its current account would show a deficit of only $50 million. This interaction helps to understand the overall economic position of a country in the global market.
Detailed Explanation
A trade deficit means a country buys more from others than it sells. Other options are incorrect because Some people think a trade deficit always means a surplus in the current account; It's a common mistake to think a trade deficit doesn't matter if net income is negative.
Key Concepts
trade deficit
net income from abroad
Topic
Current Account and Trade Balance
Difficulty
medium level question
Cognitive Level
understand
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