1. Money flows out of the Mexican economy.
2. Money flows into the Mexican economy.
3. Money flows out of the Mexican economy.

1. An export sale to Germany involves a financial flow from Germany to the U.S. economy.
2. The issue here is not U.S. investments in Brazil, but the return paid on those investments, which involves a financial flow from the Brazilian economy to the U.S. economy.
3. Foreign aid from the United States to Egypt is a financial flow from the United States to Egypt.
4. Importing oil from the Russian Federation means a flow of financial payments from the U.S. economy to the Russian Federation.
5. Japanese investors buying U.S. real estate is a financial flow from Japan to the U.S. economy.

If domestic savings increases and nothing else changes, then the trade deficit will fall. In effect, the economy would be relying more on domestic capital and less on foreign capital. If the government starts borrowing instead of saving, then the trade deficit must rise. In effect, the government is no longer providing savings and so, if nothing else is to change, more investment funds must arrive from abroad. If the rate of domestic investment surges, then, ceteris paribus, the trade deficit must also rise, to provide the extra capital. The ceteris paribus—or “other things being equal”—assumption is important here. In all of these situations, there is no reason to expect in the real world that the original change will affect only, or primarily, the trade deficit. The identity only says that something will adjust—it does not specify what.

1. Increased federal spending on Medicare may not increase productivity, so a budget deficit is not justified.
2. Increased spending on education will increase productivity and foster greater economic growth, so a budget deficit is justified.
3. Increased spending on the space program may not increase productivity, so a budget deficit is not justified.
4. Increased spending on airports and air traffic control will increase productivity and foster greater economic growth, so a budget deficit is justified.

1. A large economy tends to have lower levels of international trade, because it can do more of its trade internally, but this has little impact on its trade imbalance.
2. An imbalance between domestic physical investment and domestic saving (including government and private saving) will always lead to a trade imbalance, but has little to do with the level of trade.
3. Many large trading partners nearby geographically increases the level of trade, but has little impact one way or the other on a trade imbalance.
4. The answer here is not obvious. An especially large budget deficit means a large demand for financial capital which, according to the national saving and investment identity, makes it somewhat more likely that there will be a need for an inflow of foreign capital, which means a trade deficit.
5. A strong tradition of discouraging trade certainly reduces the level of trade. However, it does not necessarily say much about the balance of trade, since this is determined by both imports and exports, and by national levels of physical investment and savings.