Explain the effect of trade deficits on economic growth

What will be an ideal response?

The foreign sector can affect capital deepening. An economy can run a trade deficit and import investment goods to aid capital deepening. Even though it borrows from abroad, the resulting increase in GDP and wealth will enable it to repay those borrowings. However, an economy can also run a trade deficit because it wants to buy more consumer goods. In this case the economy is borrowing from abroad but there would be no capital deepening, just additional consumer spending. As a result there would be no increase in GDP and when it comes time to repay the borrowing, society will be poorer.