|Type of paper:||Case study|
|Categories:||Macroeconomics Budgeting International business Financial management|
A trade deficit represents an economic measure of global trade whereby a nation's imports surpass its exports. It should be noted that when this happens, a country is bound to be on the losing end since more money is used to buy than what is gained. A trade deficit illustrates an outflow of local currency and finances too outside markets. A trade deficit is further referred to as an adverse balance of trade and can impact an economy in numerous ways (Asche et al., 2015). For instance, a nation with trade deficits might be heavily reliant on attaining loans and financial aids from other countries, a situation that underlines the economic problems being faced. When imports exceed exports, stakeholders might opt to invest in different economies that provide value. For instance, in the case that stakeholders in the United States understand the availability of trade deficits, they might opt not to invest in the economy but diverse economies that offer the possibility of return on investment (Blecker, 2016). As such, the paper explains how trade deficits impact economies and the critical approaches that can be put in place to ensure such a situation is eradicated. In so doing, the theory of balance of trade will be used to substantiate further the need for countries to reduce trade deficits and capitalize on a country's resources.
Statement of your Opinion
Trade deficits have, for long, affected many economies since countries spend more than what they earn. Using the balance of trade theory, countries should try and balance the level of imports and exports, and in so doing, ensure the value of exports is higher than that of imports. Countries with trade deficits in the world depend on some form of financial aids, including loans from other nations, and this might be detrimental in the long term (Prasad, 2016). The economic theory indicates that incessant trade deficits might be harmful to a country's economy. When a state persistently experiences trade deficits, there are forecasted adverse implications that will affect economic stability and expansion. When exports are higher than exports, local jobs are lost to individuals overseas (Chi, 2016). A persistent trade deficit often maintains adverse implications on the interest rates in a nation. It should be noted that downward strain on a nation's money devalues it, and this makes the costs of commodities denominated in the stated currency more costly. Such a situation can result in inflation.
In combating this situation, the central bank might be inspired to implement restrictive monetary policy tools, including raising the rates of interest alongside reducing the supply of money (Rajasekar & Deo, 2016). Economically, high-interest rates and inflation puts a damper on economic expansion. By explanation, the balance of payments should always net out to nil. Consequently, trade deficits should be offset and cancelled by surpluses in the nation's financial and capital accounts (Chiu & Sun, 2016). Such indicates that countries with a deficit attain a higher degree of foreign direct investment alongside foreign ownership of regime debt. In short, countries must strive to ensure a balance of trade to reduce financial problems that might hit their regions.
Alternate View Points
For the past couple of years, the United States has been operating on trade deficits. People are arguing against this fact, while others consider it is beneficial to a nation's economy. Proponents and advocates of the economic theory and free markets say that adverse effects connected with trade deficits will correct themselves with time hence supporting the availability of the situation (Shimizu & Sato, 2015). Such class of thought believes that while theoretically trade deficits are undesirable, there is proof that the levels of unemployment might typically persist at considerably reduced levels regardless of whether high unemployment happens in nations with low surpluses (Farzanegan & Hassan, 2019). In the United States, for instance, the country is in a unique place of being the globe's largest economy, meaning that its dollar is the universal reserve currency.
Consequently, the demand for its currency is today still active regardless of the persistent deficits. Surplus nations, including China that do not use floating currency regimes but maintain a fixed pegged exchange rate compared to the dollar gain by keeping their money artificially high. This, therefore, means that stable countries in Europe and the United States have managed to operate on trade deficits but remain firm and sound financially (Friedberg, 2017). Nonetheless, this might not be the case with other smaller and struggling economies around the world. The other unstable nations must strive to reduce the levels of trade deficits if they are to continue being relevant in the global economy (Gao & Tian, 2016). It should be noted that the levels of unemployment will be on a high when countries with reduced currency levels important more than they sell to other foreign regions across the world.
Real-World Economic Implications
Trade deficits maintain an immediate effect of many economic indicators, involving essential things such as gross domestic product (GDP), among many others. Nonetheless, such statistics should be checked within the context of a nation's overall size. For instance, the United States might have a significant trade deficit. Still, because most of its services and commodities are manufactured and used locally, the trade deficit does not have a considerable effect on the average GDP (Goodwin et al., 2015). Mostly, investors and stakeholders are required to remit the closest attention to the existing account as a portion of the GDP, given that it reveals the current account level relative to the overall economic output. Countries should equate trade balances to the equal dollar of foreign direct investment in attaining universal purchasing strength (Grossi & Pianezzi, 2017). When the current account deficit goes up as a portion of GDP and foreign direct investment does not balance out, a nation is headed for problems.
In this case, trade deficits should be watched for nations depending on exports to enhance economic expansion. For instance, oil-exporting countries are reliant on trade surpluses to finance public programs alongside independent wealth funds. (Solis & Urata, 2018). Reductions in the costs of oil might result in narrowing trade surpluses hence more significant problems with public funds. In some situations, such scenarios might result in elevated political issues in the influenced regions (Handley & Limao, 2017). Trade deficits play a fundamental role in the international markets, more so in export-driven nations together with emerging markets. It is the role of investors to be mindful of the problems connected with trade deficits since such can result in reducing international purchasing might and hence elevated political risks (Huntington, 2015).
It is fundamental to consider that trade deficits do not matter as much in industrialized nations where it counts a minimal percentage of the gross domestic product. A trade deficit happens for numerous reasons, despite those countries with deficits find it challenging to manufacture adequate commodities for its businesses and clients (Kurtovic & Talovic, 2015). Nations with reduced levels of natural resources require importing materials, including oil and lumber, to fulfill their demand. Countries sometimes also specialize in precise industries or goods. A case in point is that of Canada, which imports seafood; lumber, alongside oil, whereas China sells electronics, footwear, steel, and clothing (Le, 2016). Land-locked nations have zero access to international waters hence must import seafood for their consumers.
Summary of Opinion
From the assessment above, it can be noted that trade deficits affect numerous countries across the world. Principally, trade deficits affect countries, more so the developing ones. A nation such as the United States and other superpowers in Europe have long been characterized by trade deficits but remain active because they have the resources to produce and consume locally (Liu & Woo, 2018). Such is not the case with other nations that are considered less industrialized or underdeveloped. In this paper, there is information on both perceptions of proponents and advocates of trade deficits. Proponents argue that countries should not import more than they export because of such leads to issues such as inflation and increased levels of unemployment (Masch, 2017). Nonetheless, advocates argue that such a situation will stabilize with time and should therefore not create an issue for concern.
Additionally, it is noted that trade deficits in countries compel such economies to be over-reliant on financial aids as there arise concerns with the gross domestic product, among other factors. Alternatively, a country such as the United States has been able to deal with this situation considering its global status as the world economy (Noland, 2018). The United States represents a global superpower whose currency has, over the years, maintained a high ranking. A nation such as China has been able to ward off trade deficits by valuing its money highly (Order, 2017). Also, China maintains this status, considering it exports many products into other nations across the globe. Canada, on the other hand, majorly upholds a trade surplus thanks to the high amounts of oil exports that it sells to other neighboring and distant nations. Nonetheless, the adverse effects of trade deficits outweigh its positives.
The paper evaluated how trade deficits affect economies and the major approaches that countries put in place to ensure the situation is handled. In so doing, the theory of balance of trade and economic theory was used to substantiate the need for nations to reduce trade deficits and exploit a country's resources. From the assessment, some governments effectively operate with trade deficits while others cannot stand the situation. Several factors are leading to trade deficits, with the significant element being the availability of raw materials. As indicated, a nation such as the United States can operate with a trade deficit being it produces and sells its commodities and services internally. The situation means that money circulates internally and hence reduces the levels of unemployment and inflation. Nonetheless, other countries in the likes of Canada rely on exports to support its economy. Also, landlocked nations rely on imports more than exports in feeding and sustaining its people, considering that some seafood is not available. To sum up, it is fundamental for nations to reduce the incidence of trade deficit since it might adversely affect the economy.
Asche, F., Bellemare, M. F., Roheim, C., Smith, M. D., & Tveteras, S. (2015). Fair enough? Food security and the international trade of seafood. World Development, 67, 151-160.
Blecker, R. A. (2016). Beyond the Twin Deficits: A Trade Strategy for the 1990s: A Trade Strategy for the 1990s. Routledge.
Chi, J. (2016). Exchange rate and transport cost sensitivities of bilateral freight flow between the US and China. Transportation Research Part A: Policy and Practice, 89, 1-13.
Chiu, Y. B., & Sun, C. H. D. (2016). The role of the savings rate in the exchange rate and trade imbalance nexus: Cross-countries evidence. Economic Modelling, 52, 1017-1025.
Farzanegan, M. R., & Hassan, S. M. (2019). How does the flow of remittances affect the trade balance of the Middle East and North Africa?. Journal of Economic Policy Reform, 1-19.
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