Balance of trade
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Balance of trade figures, also called net exports (NX), are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. They form part of the balance of payments, which also includes other transactions such as the international investment position.
The figures are usually split into visible and invisible balance figures. The visible balance represents the physical goods, and invisible represents other forms of trade, e.g. the service economy.
A positive balance of trade is known as a trade surplus and consists of exporting more (in financial capital terms) than one imports. A negative balance of trade is known as a trade deficit or, informally, as a trade gap, and consists of importing more than one exports. Neither is necessarily dangerous in modern economies, although large trade surpluses or trade deficits may sometimes be a sign of other economic problems.
Factors that can affect the balance of trade figures include:
- Prices of goods manufactured at home (influenced by the responsiveness of supply),
- Exchange rates, and
- Trade agreements or barriers
- other tax, tariff and trade measures
Measuring the balance of payments can be problematic, due to problems with recording and collecting data. As an illustration of this problem, when official data for all countries in the world is added up it appears that the world is running a positive balance of payments with itself. The total reported amount of exports in the world is greater by a few percent than the total reported amount of imports. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, and other visibility problems.
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Economic impact of balance of trade
If the balance of trade is positive, then an economy exported more than it had imported. This may appear to be a good thing but may not always be so. An example of an economy in which a positive balance of payments is generally regarded as a bad thing is Japan in the 1990s. Because Japan had a consistently positive balance of payments, it had more currency than it could effectively invest, and it was reluctant to also offer full access to its own markets. This led to huge Japanese overseas purchases of items such as real estate, which were of questionable economic value. Furthermore, the protectionist measures that created the positive balance of trade also caused the price of goods in Japan to be much higher than they would have been had imports been freely allowed. The foreign currency Japanese companies earned overseas remained largely unconverted into yen in order to suppress the yen's value, further preventing Japanese consumers from benefiting from the trade surplus. It is also possible for the terms of trade to be lower than before if there is an improvement in the balance of trade.
Negative balances are not necessarily terrible news, either. By economic definition, a persistent trade deficit can only exist if there is a corresponding capital surplus. Otherwise, the currency would naturally decline until the deficit were eliminated.
Trade imbalance can lead to the loss of jobs, such as the loss of 1.5 million U.S. jobs to China between 1989 and 2003, though microeconomists point out this has not been a gross job loss, the total employment level has actually increased). Other impacts include the cost of debt servicing, and the increased vulnerability of domestic economies to confidence of foreign holders of debt. This is countered by the microeconomic argument that debt is serviced at the same cost to foreign and domestic buyers and that foreign bond holders would gain no benefit by flooring the price of the debt by selling it (they would lose almost as much money).
Dissenting opinion about trade deficits
Most economists do not believe that trade deficits are inherently good or bad; some even believe they should be ignored entirely. They do believe that trade deficits are generally harmful when countries engage in currency controls such as fixed or pegged exchange rates. They argue that fixed exchange rates do not allow the market to naturally correct any current account “problems”.
Milton Friedman has argued that many of the fears of trade deficits are unfair criticisms in an attempt to push macroeconomic policies favorable to export industries. He states that these deficits are not harmful to the country as the currency always comes back to the country of origin in some form or another. He continues by informing readers that the "worst case scenario" of the currency never returning to the country of origin is actually the best possible outcome; as the country just purchased goods by exchanging pieces of cheaply made paper.
If these current account "problems" become unstable and unsustainable, Friedman notes that the market will correct any "problems" as floating currency rates will rise or fall with time to encourage or discourage imports in favor of the exports, and then possibly reverse again in favor of imports as the currency gains strength.
Friedman and other economists also point out that a large trade deficit (importation of goods) signals that the currency of this country is strong and desirable. Citizens of such a country also receive the benefit of having the ability to choose between many competing consumables and lower prices than they would otherwise experience if the currency was weaker and the country was "enjoying" a trade surplus. To Milton Friedman, a trade deficit simply means that consumers get to purchase and enjoy more goods at lower prices; conversely, a trade surplus implies that a country exported goods that its own citizens did not get to consume and enjoy, while paying high prices for the goods that were consumed.
These trade deficit "problems" were explained in detail by Milton Friedman in Free to Choose, and his simple points re-examined by Dr. Reed. They can be found here: [1]
The United States trade deficit
The United States has posted a trade deficit since the 1970s, and it has been rapidly increasing since 1997 (see chart below). The trend indicates that the trade deficit increases most rapidly during times of economic expansion, and slowly during times of contraction. Image:USTrade1991-2005.png The persistence of the trade deficit has been attributed to a number of factors, including:
- The dollar's role as a reserve currency
- Continued growth in the US economy
- Continued high demand for American investment assets
- Rising oil prices
- Globalization
The trade deficit in the United States has resulted in, is caused by or represents:
- A rise in imported products from countries such as China (along with a slower rising rate of exports).
- A fairly strong dollar relative to many other nations.
- A fairly high demand for American capital, including investments and property.
Physical trade balance
Monetary trade balance is different from physical trade balance (which is expressed in amount of raw materials). Developed countries usually import a lot of primary raw materials from developing countries at low prices. Often, these materials are then converted into finished products, and an enormous amount of value is added. Although the EU (and other developed countries) has a balanced monetary trade balance, its physical trade balance (especially with developing countries) is negative, meaning that in terms of materials a lot more is imported than exported. That means the ecological footprint of developed countries is much larger than that of developing countries.
See also
- Balance of payments
- Balanced trade
- List of countries and territories by current account balance
- List of international trade topics
- Terms of trade
External links
- America's Maligned and Misunderstood Trade Deficit
- Congressional Research Service (CRS) Reports regarding the U.S. trade deficitde:Handelsbilanz
es:Balanza comercial fr:Balance commerciale nl:Handelsbalans sv:Handelsbalans zh:贸易逆差