Budget deficit involve reduction in a countries saving and an increase in the debt of a country compared to its GDP. It means that a country has less to save and more expenditures. On the other hand, trade deficits are as a result of an increase in foreign claims on a countries economy (Phillips 43). Budget deficits usually lead to a less stable economy that may lead to adjustment in the strength of a currency. For instance, the recent trend of budget deficits in the USA lead to a stronger dollar compared to other world currencies like the Chinese Yuan.
This created a very unfavorable trading platform for the US since its goods had a lot of difficulties in entering into other countries compared to those of other countries like China and Japan. Expensive goods means less demand and eventually dropped returns. On the other hand, the country imports much of foreign goods since they are affordable. This situations creates very huge trade deficits in the country.
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