According to economic theory, fast-growing countries should be running ________, but the evidence is that in fast-growing countries, ________.

Question

Quizplus · Accepted Answer

According to the permanent-income hypothesis, people's consumption patterns are not affected by temporary changes in income, such as a sudden increase in economic growth. Therefore, if a country experiences fast economic growth, its citizens would not increase their consumption in proportion to their income, leading to a trade surplus. However, the evidence shows that fast-growing countries tend to have trade deficits, indicating that the permanent-income hypothesis does not hold.

According to Economic Theory, Fast-Growing Countries Should Be Running ________