Assume a small open economy's domestic output (Y) is $750 million, its domestic spending is $850 million, and total imports are $150 million. Therefore, the country runs a trade ________, and total exports are ________.a.deficit; $50 millionb.surplus; $250 millionc.surplus; $50 milliond.deficit; $250 million
Question
Assume a small open economy's domestic output (Y) is 850 million, and total imports are 150 million. Therefore, the country runs a trade ________, and total exports are ________.a.deficit; 50 millionb.surplus; 50 milliond.deficit; $250 million
Solution
The country runs a trade deficit because its domestic spending is greater than its domestic output. This means it is importing more than it is exporting.
To find the total exports, we need to use the formula for net exports, which is exports minus imports. In a trade deficit, net exports are negative.
We know that domestic spending (consumption) is 750 million. The difference between these two amounts is the trade balance, which is -$100 million (a deficit).
We also know that imports are $150 million.
We can use the formula for net exports (exports - imports) and rearrange it to solve for exports:
Exports = Net exports + Imports
Substituting the given values:
Exports = -150 million = $50 million
So, the country runs a trade deficit, and total exports are 50 million.
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