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Principles of Economics- Mankiw (5th) 668

Principles of Economics- Mankiw (5th) 668 - 690 PA R T E L...

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690 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES much, so the result was a large budget deficit. Our model of the open economy predicts that such a policy should lead to a trade deficit, and in fact it did, as we saw in a case study in the preceding chapter. The budget deficit and trade deficit during this period were so closely related in both theory and practice that they earned the nickname the twin deficits. We should not, however, view these twins as identical, for many factors beyond fiscal policy can influence the trade deficit. TRADE POLICY A trade policy is a government policy that directly influences the quantity of goods and services that a country imports or exports. As we saw in Chapter 9, trade policy takes various forms. One common trade policy is a tariff, a tax on im- ported goods. Another is an import quota, a limit on the quantity of a good that can be produced abroad and sold domestically. Trade policies are common throughout the world, although sometimes they are disguised. For example, the U.S. govern-
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