Multiple Choice
Which of the following is a disadvantage of globalization in the context of externalities, social benefits, and social costs?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following is NOT an effect of our country running a trade deficit?
A
A reduction in the country's overall social benefits from trade
B
A decrease in the country's net exports
C
An increase in foreign ownership of domestic assets
D
A need to borrow from foreign lenders to finance the deficit
Verified step by step guidance1
Step 1: Understand what a trade deficit means. A trade deficit occurs when a country's imports exceed its exports, leading to negative net exports. Mathematically, net exports (NX) are given by \(NX = Exports - Imports\). When \(NX < 0\), the country runs a trade deficit.
Step 2: Analyze the direct effects of a trade deficit. Since net exports are negative, this directly causes a decrease in the country's net exports, which matches one of the options.
Step 3: Consider the financing of the trade deficit. To pay for more imports than exports, the country must borrow from foreign lenders or attract foreign investment, leading to an increase in foreign ownership of domestic assets and a need to borrow from abroad.
Step 4: Evaluate the claim about social benefits from trade. Trade deficits do not necessarily reduce the overall social benefits from trade because trade can still provide gains such as access to a variety of goods, increased efficiency, and specialization benefits. The social benefits depend on broader economic factors, not just the trade balance.
Step 5: Conclude which option is NOT an effect of running a trade deficit by comparing the logical implications of each statement with the economic theory behind trade deficits.
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