Suppose the United States initially has a trade deficit. Then U.S. firms increase their imports from Canada, financing that increase by borrowing from Canada. The current account deficit is now
And the capital account surplus is now .

Question

Quizplus · Accepted Answer

When U.S. firms increase their imports from Canada, the current account deficit becomes larger because imports are part of the current account. Financing these imports by borrowing from Canada increases the capital account surplus, as borrowing from abroad is recorded as a capital inflow.

Suppose the United States Initially Has a Trade Deficit