2/3 That said, consider what might happen to a county’s external when a country drastically reduces imports.
Imports Chg=Big Neg
Minus Exports Chg=?
Minus Services=?
Minus Investments=?*
———————-
Net External = Zero
*Includes Cash Flow
1/3 In finance, the sum of ALL transactions must BALANCE.
This doesn’t mean our trade should balance, or that our net investments should zero out. Indeed, national welfare is generally best served when trade and net investments are imbalanced.
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Discussion
3/3 If our imports experience a big drop (negative), the imports drop must be offset in in either our services trade, our net investments, or our exports.
The compensating adjustment appears mostly a big drop in our exports.