Passage 2
Economists have long debated the precise relationship between a nation’s trade deficit and the value of its currency. A trade deficit occurs when a country imports more goods and services than it exports. Orthodox economic theory posits a direct causal link: a persistent trade deficit leads to a depreciation of the nation’s currency. The reasoning is straightforward. As a country imports more, it sells its currency to buy foreign currency to pay for the imports. This increased supply of the domestic currency on the international market, combined with a decreased demand from foreign buyers who are importing less from the deficit nation, lowers its value. A weaker currency, in turn, makes the nation’s exports cheaper and its imports more expensive, a mechanism that should, over time, correct the imbalance.
However, recent economic data and some revisionist theories challenge this simple narrative. For one, global capital flows have become a far more significant determinant of currency values than trade in goods and services. A nation with a large trade deficit can maintain a strong currency if it is also attracting a large influx of foreign investment. For example, investors seeking a safe haven for their capital or high returns on their investments may pour money into a country, increasing the demand for its currency and propping up its value, regardless of its trade performance.
Furthermore, the relationship between currency value and trade balance is not always as clear-cut as the orthodox theory suggests. A country with a strong currency might see its trade deficit grow, not because of the currency’s value alone, but because of other factors such as its consumers’ strong preference for foreign goods, or a lack of competitiveness in its domestic industries. The global economy is a complex system where multiple factors—from interest rates and political stability to consumer demand and investor confidence—interact to influence currency values, making a simple, one-to-one causal link between trade deficits and currency depreciation an oversimplification.
The primary purpose of the passage is to:
According to the orthodox economic theory described in the first paragraph, a trade deficit would be expected to lead to:
The author mentions "investors seeking a safe haven" in order to:
Which of the following, if true, would most strengthen the orthodox economic theory as it is described in the passage?
The author's attitude toward the orthodox economic theory can be best described as:
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