Which of the following statements is true? a. As a rule of thumb, over the past

Question

Which of the following statements is true?

a. As a rule of thumb, over the past decade, countries that haverun a trade surplus have grown faster than countries that have runa trade deficit.
b. Over the past decade, countries that have run a trade deficithave had zero or negative economic growth
c. Trade and budget deficits are the two most important indicatorsof a country's overall economic health
d. To compare the magnitude of federal budget deficits acrosscountries, we need to compare the budget deficit as a percentage ofdomestic GDP.

Explanation / Answer

I would argue that the answer is d) This is because there are many other important factorsaffecting overall economic health, such as growth, per capita GDPetc. But in order to compare budget deficits, you need somerelative level of comparison. Because a small country likeTokelau (outside of New Zealand), with a GDP of $1.5million (PPP), could have a budget deficit of $1 million,which would be enormous for them, but insignficant to the UnitedStates, which has a GDP of $14.441 trillion (PPP). Thus in order to compare them, they need to be a relativeproportion, not just nominal figures.

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