Let’s translate “The United States is a great place to invest” into a simple GDP story. Recall that GDP = C + I + G + Net exports. In this story, foreigners build up the U.S. capital stock by pushing investment (I) above its normal level. Thus, GDP equals 100 in the “now” period but equals 110 in the “later” period. To keep it simple, assume that C + G = 80 throughout.
a. The “great place to invest” story comes in two parts: In part one (now), the United States has high I and low (really, negative) net exports. If I = 35, what do net exports equal? Is this a trade deficit or a trade surplus?
b. In part two (later), foreign countries are tired of sending so many machines and pieces of equipment to the United States, and want to start receiving goods from the United States. Net exports now become positive, rising to 5. What does I equal?