A country has a trade deficit its

Question

a.

net capital outflow must be negative and saving is larger than investment.
b.

net capital outflow must be positive, and saving is larger than investment.
c.

net capital outflow must be positive and saving is smaller than investment.
d.

net capital outflow must be negative and saving is smaller than investment.

Answer 1

The correct answer is:

d. net capital outflow must be negative and saving is smaller than investment.

Explanation: A trade deficit occurs when a country imports more goods and services than it exports. This situation implies that the country is borrowing from abroad (i.e., financing its trade deficit through foreign investment) rather than lending to other countries. Therefore, net capital outflow (NCO) is negative as it indicates that more capital is flowing into the country than flowing out.

In this scenario, domestic investment exceeds national savings, meaning saving is smaller than investment. Thus, option (d) correctly describes the relationship between trade deficit, net capital outflow, savings, and investment.