APT Extract 2 1. The graph for China is continuously positive therefore it is running a persistent surplus. The USA is running a persistent deficit as shown by the fact that the graph is continuously negative. 2. High levels of consumption and investment. A change in comparative advantage causing cheaper goods/services imported rather than domestically produced. Overvalued currency, causing consumers to buy cheaper imported goods. Structural weakness in the economy so loss of market share. 3. In the case of China, surplus is occurring as national output exceeds domestic demand. The Chinese production greatly outstrips Chinese demand for goods and services and so there is a massive trade surplus. 4. Retrieving a government bond is a way for the firm or government to borrow money at certain interest rates. In return for buying the bond and investor gets a certain interest rate for the duration of the bond. 5. China is making use of its vast factor resources and low cost labour. Chinese producers have been able to undercut producers in the high income economies of the west and with much improved quality competitiveness have represented good value for money. Its willingness to suppress the ER in order to gain cost advantage enhances its competitiveness. 6. The US deficit reflects the inability of domestic users to compete with Chinese rivals and because of excess consumption. USA domestic demand exceeds national output, so the country is buying more from abroad than it is selling. 7. If there is a depreciation in the exchange rate then that country will experience a fall in the foreign price of its exports. It will appear more competitive thus there’ll be a rise in the quantity of exports. Assuming demand for exports is relatively elastic then a depreciation will lead to an increase in the value of exports and therefore improve the