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True or False:  If the US is growing faster than the rest of the world, then all else...

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lilylee | Student, College Freshman | Salutatorian

Posted June 23, 2013 at 8:11 PM via web

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True or False:  If the US is growing faster than the rest of the world, then all else constant, the trade deficit will widen (get more negative assuming we were running a trade deficit to begin with).

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 23, 2013 at 8:53 PM (Answer #1)

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This statement is true.  When the US economy grows faster than the economies of other countries, the gap between imports and exports will grow larger.

The trade deficit is the difference between the value of goods and services that the US imports and those that it exports.  If the US starts to import more its trade deficit will increase unless its exports grow at a rate that matches its imports.

If the US economy grows faster than other economies, it will mean that Americans will have more money relative to people in other countries.  When our economy grows, the total amount of money that we make in our country grows.  When the amount of money that we make grows, so does our consumption.  If we consume more then, all other things being equal, we will import more goods.  If our economy is growing faster than the economies of other countries, our imports will rise faster than their imports do as well.  This will mean that our trade deficit will get larger.

Thus, this statement is true because higher growth leads to more importing. 

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