When the trade deficit decreases due to government policy, domestic investment in the country does not decrease as well. This is because there is an indirect, or inverse, relationship between trade deficit and domestic investment. Conversely, there is a direct relationship between trade deficit and domestic savings. When the deficit decreases, savings decrease but investment does not decrease.
The current accountis equal to the sum of the trade balance [deficit or surplus] and...
When the trade deficit decreases due to government policy, domestic investment in the country does not decrease as well. This is because there is an indirect, or inverse, relationship between trade deficit and domestic investment. Conversely, there is a direct relationship between trade deficit and domestic savings. When the deficit decreases, savings decrease but investment does not decrease.
The current account is equal to the sum of the trade balance [deficit or surplus] and national income plus debts, and it reflects the indirect relationship between domestic savings and domestic investment. It also reflects the indirect relationship between trade deficit and domestic investment. The current account balance is equal to "the difference between national saving and national investment" (Federal Reserve).
Current account balance (deficit or surplus) is used interchangeably with trade balance, indicating either trade deficit or surplus. Consequently, the relationship between trade deficit and domestic investment is the same relationship as the one between current account balance and domestic investment: they move in opposite directions at any given time.
If trade deficit has a direct relationship with savings—with both moving in the same direction at the same time (decreasing or increasing at the same time)—then there is also an indirect relationship between trade deficit and domestic investment, with each moving in the opposite direction from the other at any given time (decreasing or increasing in opposition to each other).
If trade balance (trade deficit) is equal to the difference between domestic savings and domestic investment, and if the movements of trade deficit and domestic savings are directly correlated, then the relationship between trade deficit and domestic investment must be an indirect, inverse relationship, with movement opposite to each other. If trade deficit decreases due to government policy, then domestic investment does not decrease; domestic savings decrease.
The current account is the sum of the trade balance and. . . transfers of income. . . [I]t is common to see the terms “current account balance” and “trade balance” used interchangeably. . . The current account also reflects a comparison of national saving and national investment. . . [T]he current account balance is equal to the difference between national saving and national investment. . . When a country has a current account deficit, national saving must, by definition, be below investment (Federal Reserve Bank of San Francisco).
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