The table below shows the values of various economic variables of a country during a particular year.

-Refer to the table above.If a trade deficit of $23,000 occurs in the next year,GDP will ________,all other variables remaining unchanged.
A) fall to $325,000
B) increase by $2,000
C) fall by $2,000
D) increase to $531,000

Question

The table below shows the values of various economic variables of a country during a particular year.
 
-Refer to the table above.If a trade deficit of $23,000 occurs in the next year,GDP will ________,all other variables remaining unchanged.
A) fall to $325,000 
B) increase by $2,000 
C) fall by $2,000 
D) increase to $531,000

Quizplus · Accepted Answer

A trade deficit means that the country is importing more goods and services than it is exporting. This will decrease the country's net exports (NX), which is a component of the GDP equation. If we use the GDP equation: GDP = C + I + G + NX, we can see that a decrease in NX will decrease GDP. The decrease in GDP needed to balance out a $23,000 trade deficit can be calculated by multiplying the marginal propensity to import (0.2) by the trade deficit ($23,000) and dividing by (1 - 0.2) = 0.8. This gives us a decrease in GDP of $28,750. Subtracting this from the current GDP of $353,750 gives us a new GDP of $325,000. Therefore, option A is correct.

The Table Below Shows the Values of Various Economic Variables