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A trade deficit doesn't involve domestic capital leaving the country but rather an imbalance in imports and exports, affecting the flow of goods and services. The national saving and investment identity plays a crucial role in understanding how factors like domestic investment, saving, and government borrowing impact trade deficits.
False. During a trade deficit, domestic capital doesn't leave the nation's economy to be invested abroad. Instead, a trade deficit means the country is importing more goods and services than it is exporting - leading to a flow of goods and services rather than capital.
The national saving and investment identity governs how different factors can absorb foreign financial capital, influencing trade deficits by affecting domestic saving, investment, and government borrowing.
For instance, a rise in domestic investment without changes in private and public saving can contribute to a higher trade deficit, as experienced in the U.S. in the late 1990s due to increased business investment and reliance on foreign capital.
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