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By the end of this section, you will be able to:

  • Discuss twin deficits as they related to budget and trade deficit
  • Explain the relationship between budget deficits and exchange rates
  • Explain the relationship between budget deficits and inflation
  • Identify causes of recessions

Government budget balances can affect the trade balance. As The Keynesian Perspective chapter discusses, a net inflow of foreign financial investment always accompanies a trade deficit, while a net outflow of financial investment always accompanies a trade surplus. One way to understand the connection from budget deficits to trade deficits is that when government creates a budget deficit with some combination of tax cuts or spending increases, it will increase aggregate demand in the economy, and some of that increase in aggregate demand will result in a higher level of imports. A higher level of imports, with exports remaining fixed, will cause a larger trade deficit. That means foreigners’ holdings of dollars increase as Americans purchase more imported goods. Foreigners use those dollars to invest in the United States, which leads to an inflow of foreign investment. One possible source of funding our budget deficit is foreigners buying Treasury securities that are sold by the U.S. government. So a budget deficit is often accompanied by a trade deficit.

Twin deficits?

In the mid-1980s, it was common to hear economists and even newspaper articles refer to the twin deficits, as the budget deficit and trade deficit both grew substantially. [link] shows the pattern. The federal budget deficit went from 2.6% of GDP in 1981 to 5.1% of GDP in 1985—a drop of 2.5% of GDP. Over that time, the trade deficit moved from 0.5% in 1981 to 2.9% in 1985—a drop of 2.4% of GDP. In the mid-1980s, the considerable increase in government borrowing was matched by an inflow of foreign investment capital, so the government budget deficit and the trade deficit moved together.

U.s. budget deficits and trade deficits

The graph shows little relation between the rising (getting larger) and falling of the budget deficit and trade deficit since the 1980s.
In the 1980s, the budget deficit and the trade deficit declined at the same time. However, since then, the deficits have stopped being twins. The trade deficit grew smaller in the early 1990s as the budget deficit increased, and then the trade deficit grew larger in the late 1990s as the budget deficit turned into a surplus. In the first half of the 2000s, both budget and trade deficits increased. But in 2009, the trade deficit declined as the budget deficit increased.

Of course, no one should expect the budget deficit and trade deficit to move in lockstep, because the other parts of the national saving and investment identity—investment and private savings—will often change as well. In the late 1990s, for example, the government budget balance turned from deficit to surplus, but the trade deficit remained large and growing. During this time, the inflow of foreign financial investment was supporting a surge of physical capital investment by U.S. firms. In the first half of the 2000s, the budget and trade deficits again increased together, but in 2009, the budget deficit increased while the trade deficit declined. The budget deficit and the trade deficits are related to each other, but they are more like cousins than twins.

Questions & Answers

HOW CAN MAN ORGAN FUNCTION
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the diagram of the digestive system
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allimentary cannel
Ogenrwot
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They formed in two ways first when one sperm and one egg are splited by mitosis or two sperm and two eggs join together
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Josephine Reply
Genetics is the study of heredity
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discuss biological phenomenon and provide pieces of evidence to show that it was responsible for the formation of eukaryotic organelles
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the study of living organisms and their interactions with one another and their environments
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the study of living organisms and their interactions with one another and their environment.
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list any five characteristics of the blood cells
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advantage of electronic microscope is easily and clearly while disadvantage is dangerous because its electronic. advantage of light microscope is savely and naturally by sun while disadvantage is not easily,means its not sharp and not clear
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cells is the basic structure and functions of all living things
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ISCONT Reply
is organisms that are similar into groups called tara
Yamosa
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Kenna Reply
A scanning electron microscope (SEM) is ideal for situations requiring high-resolution imaging of surfaces. It is commonly used in materials science, biology, and geology to examine the topography and composition of samples at a nanoscale level. SEM is particularly useful for studying fine details,
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Diversity of living thing
ISCONT
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Cell division is the process by which a single cell divides into two or more daughter cells. It is a fundamental process in all living organisms and is essential for growth, development, and reproduction. Cell division can occur through either mitosis or meiosis.
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Source:  OpenStax, Principles of macroeconomics for ap® courses. OpenStax CNX. Aug 24, 2015 Download for free at http://legacy.cnx.org/content/col11864/1.2
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