The twin deficit identify suggests that there is a relationship between the government ‘s fiscal policy ( budget deficit or surplus) and the:

The twin deficit hypothesis suggests that there is a relationship between a government's fiscal policy (budget deficit or surplus) and the country's balance of trade (trade deficit or surplus).

Here are the steps to understand this relationship:

1. Fiscal Policy: This refers to the government's revenue collection (through taxes) and expenditure. When a government spends more than it collects, it results in a budget deficit.

2. Trade Balance: This refers to the difference between a country's exports and imports. If a country imports more than it exports, it results in a trade deficit.

3. Twin Deficit Hypothesis: This hypothesis suggests that an increase in the budget deficit will lead to an increase in the trade deficit. The reasoning is that when a government increases its spending (leading to a budget deficit), it stimulates demand in the economy.

4. Increased Demand: This increased demand can lead to an increase in the import of goods and services (if the domestic production cannot meet the increased demand), leading to a trade deficit.

5. Foreign Borrowing: To finance both the budget and trade deficits, the country may need to borrow from foreign countries, which can lead to an increase in the country's debt.

So, in summary, the twin deficit hypothesis suggests a relationship between a government's fiscal policy and the country's balance of trade.