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Balance of Payments

Trade Balances and Flows of Financial Capital

LEARNING OBJECTIVES

By the end of this section, you will be able to:

  • Explain the connection between trade balances and financial capital flows
  • Calculate comparative advantage
  • Explain balanced trade in terms of investment and capital flows

As economists see it, trade surpluses can be either good or bad, depending on circumstances, and trade deficits can be good or bad, too. The challenge is to understand how the international flows of goods and services are connected with international flows of financial capital. In this module we will illustrate the intimate connection between trade balances and flows of financial capital in two ways: a parable of trade between Robinson Crusoe and Friday, and a circular flow diagram representing flows of trade and payments.

Source: OpenStax, https://courses.lumenlearning.com/suny-fmcc-macroeconomics/chapter/trade-balances-and-flows-of-financial-capital/
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