Suppose a country that had balanced trade began to run a trade deficit. At the same time, consumption as a share of GDP increased but the investment share did not. Do you think there was an increase in capital deepening?

A. Yes, because the trade deficit can be used to purchase more capital.

B. Yes, because investment must have fueled the trade deficit.

C. No, because the country initially had balanced trade.

D. No, because consumption, not investment, has fueled the trade deficit

Question

Mary Duffy

Business

15 December, 17:42

Suppose a country that had balanced trade began to run a trade deficit. At the same time, consumption as a share of GDP increased but the investment share did not. Do you think there was an increase in capital deepening?

A. Yes, because the trade deficit can be used to purchase more capital.

B. Yes, because investment must have fueled the trade deficit.

C. No, because the country initially had balanced trade.

D. No, because consumption, not investment, has fueled the trade deficit

+3

Answers (1)

Know the Answer?

Malia Hamilton · Answer 1

D. No, because consumption, not investment, has fueled the trade deficit

Explanation:

Capital deepening requires an increase in the amount of capital in proportion to labor. To increase the amount of capital, investments are required.

In this example, investment as a percentage of GDP has not increased, while consumption has, but consumption does not directly increase capital.