Economists use the phrase trade deficit to describe a condition when t

Economists use the phrase trade deficit to describe a condition when the dollar value of an economy's imports exceed the dollar value of an economy's exports. Some political analysts believe that trade deficits are a sign of weakness in an economy. They opine that trade deficits cause an economy to lose jobs and drain the wealth of a nation. A closer analysis, however, reveals that trade deficits might not be a cause of economic weakness.

One misconception is that trade deficits cause an increase in unemployment. The problem with this analysis is that it confuses the loss of certain jobs with a decrease in the total number of jobs. For example, when two nations drop their barriers to trade, certain industries in one country might incur losses in the new more competitive market, resulting in a job loss. But each nation will move more efficiently towards production in areas of comparative advantage, while the consumers of each nation will be in a position to purchase goods at the most competitive prices. While it is beneficial for a nation or region to have comparative advantages in profitable sectors of the economy, efforts to offset the lack of comparative advantage by protecting an economy will only lead to inefficiently high subsidies, whether from a government or in the form of higher prices paid by consumers.

Another misconception surrounding trade deficits is that they drain the wealth of a nation. However, just because money flows from an economy doesn't mean that the economy becomes weaker. Trade deficits are offset by capital account surpluses. The current account measures the various flows of goods across countries while the capital account refers to a country's assets. Countries that have current account surpluses will have capital account deficits, and vice versa. This capital account surplus means that more assets in the form of cash, property, and other assets are flowing into the home country. Having greater assets means that the country has more money to invest in business, which in turn raises productivity.

The author's main point is that

a) although trade deficits entail current account deficits, the countervailing capital account surplus creates substantial economic benefits
b) every nation should aim to incur large trade deficits because, contrary to common opinion, these deficits actually improve the economy
c) the strength of a nation's economy depends on the size of its trade deficits with other nations whose high subsidies create inflated prices for their consumers
d) the claim that a trade deficit creates an unhealthy economy relies on two common misconceptions about a trade deficit's effects on jobs and a nation's wealth
e) because global economic systems are so complex, misconceptions about employment rate, a nation's wealth, and especially trade deficits are common




Which of the following, if true, would strengthen the author's conclusion that greater assets mean higher productivity?

a) The assets that a country builds up when the economy is healthy are likely to be invested abroad.
b) The more assets a country has, the more its citizens can save to purchase homes.
c) Each current account surplus is offset by an equal capital account deficit, and vice versa.
d) When assets flow into a capital account, they are owned by private enterprise.
e) A country's assets are typically invested in domestic businesses.




The misunderstanding addressed in the second sentence of paragraph 2 is most similar to which one of the following situations?

a) Investors in a company sell its stock when sales of a certain product dip, even though the company's quarterly profits rose.
b) A babysitter decides to work for a family with three children instead of a family with two children, even though the pay is same.
c) A movie-goer avoids seeing a film that received only one poor review, although it was from a prominent critic, and instead sees a film that got many bad reviews.
d) To ensure the kitchen will be able to handle orders, a restaurant decreases the prices of its appetizers after it began serving food to guests sitting at the bar.
e) In spite of a construction company's new policy of shorter breaks for its workers, productivity drops.




According to the passage, which of the following is true of trade deficits?

a) Trade deficits are exclusive to the United States and other developed countries.
b) Trade deficits occur when a country has a capital account surplus and a current account deficit.
c) Trade deficits can lead to budget deficits.
d) Countries should work to prevent trade deficits.
e) Political analysts and economists are in agreement about the consequences of a trade deficit.