Assume a small open economy's domestic output (Y) is $650 million, its domestic spending is $550 million, and total imports are $150 million. Therefore, the country runs a trade ________, and total exports are ________.a.surplus; $50 millionb.surplus; $250 millionc.deficit; $50 milliond.deficit; $250 million
Question
Assume a small open economy's domestic output (Y) is 550 million, and total imports are 150 million. Therefore, the country runs a trade ________, and total exports are ________.a.surplus; 50 millionb.surplus; 50 milliond.deficit; $250 million
Solution
In a small open economy, the difference between domestic output (Y) and domestic spending gives us the net exports, which is the difference between what a country exports and imports.
In this case, the domestic output (Y) is 550 million. So, the net exports are 550 million = $100 million.
This means the country exports $100 million more than it imports, so it runs a trade surplus.
Now, to find the total exports, we add the net exports to the total imports. So, the total exports are 150 million (imports) = $250 million.
Therefore, the country runs a trade surplus, and total exports are $250 million.
So, the correct answer is b. surplus; $250 million.
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