Q. Consider the following statements with reference to trade deficit::
1.When money spent on imports exceeds that spent on exports in a country, a trade deficit occurs.
2.Trade deficit can decrease a country’s currency value.
3.Trade deficits allow countries to consume less than they produce.
Which of the statements given above is/are correct?
Statement 1 and 2 are correct. When money spent on imports exceeds that spent on exports in a country, a trade deficit occurs. Trade deficit can decrease the local currency’s value because when imports exceed exports, a country’s currency demand in terms of international trade is lower. Lower demand for currency makes it less valuable in the international markets.
Statement 3 is incorrect. Trade deficits allow countries to consume more than they produce because trade deficit means importing more and exporting less which means increased in consumption.