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 and financial account surplus is now .

Question

Quizplus · Accepted Answer

The current account deficit becomes larger because the U.S. is importing more, which increases the deficit. The capital and financial account surplus also becomes larger because the U.S. is borrowing more from Canada to finance these imports.

Suppose the United States Initially Has a Trade Deficit