Question

Explain why a U. S. recession that occurs as the rest of the world is expanding will tend to reduce the U. S. Trade deficit.

Answer 1

U.S. recession that takes place as the rest of the world is expanding will tend to lower the U.S. Trade deficit due to a fall in domestic income. The decrease in the domestic earnings in the U.S. at the time of recession was the only factor for the decrease in the U.S. Trade Deficit. As the decrease in domestic earnings results in a decrease in the purchases of worldwide goods and services by the citizens of the United States. As slowing down in the inflation rate of the U.S. at that point in time compared to the other country's inflation promotes exports due to which trade deficit decreased.