The US has faced both a trade deficit and a budget deficit o

The US has faced both a trade deficit and a budget deficit, often referred to as “twin deficits”. Explain how these two deficits are related. Show how an increase in the budget deficit is likely to be associated with a deepening of the trade deficit.

Solution

The trade deficit and the budget defficit are directly realted and a budget deficit would likely to increase the tarde deficit. A budget deficit occurs when the expenses are greater than the governemnt revenue and the trade deficit coccurs when the imports are greater than the exports. The trade defict also known as the current account deficit.

When the revenues falls short of the spending the government has to borrow from the other nations so this would cause a trade deficit. So a budget defict leads to trade deficit.