Practice Quiz

Case Interview Prep

Category - Economics

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Benin is an African country with a small open economy. An increase in Benin’s trade deficit is more likely due to the following EXCEPT:
  1. an increase in government regulations
  2. an increase in world interest rates
  3. an increase in government spending
  4. an increase in exports in comparison to imports
Explanation
Answer: D - An increase in Benin’s trade deficit is not likely to be due to an increase in exports in comparison to imports.

Key Takeaway: A small open economy is vulnerable to trade deficits if imports in a given year are much higher than exports. Lower manufacturing bases and decreased productivity lead to a reduction in exports and a likelihood that a country imports much of its goods and services. This will lead to a trade deficit.
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