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Balance of Trade

Balance of Trade



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Published by mahantesh123

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Categories:Types, School Work
Published by: mahantesh123 on Feb 09, 2009
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Balance of trade
From Wikipedia, the free encyclopedia
Jump to:navigation, search The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going through thePanama Canal.
balance of trade
net exports
, sometimes symbolized as
)is the difference between the monetary value oexportsandimportsin an economy over a certain period of time. A positive balance of tradeis known as a
trade surplus
and consists of exporting more than isimported; a negative balance of trade is known as a
trade deficit
or,informally, a trade gap. The balance of trade is sometimes divided intoa goods and a services balance; especially in theUnited Kingdomthetermsvisibleandinvisiblebalance are used.
[edit] Definition
 The balance of trade forms part of thecurrent account, which alsoincludes other transactions such as income from theinternationalinvestment positionas well as international aid. If thecurrent account  is in surplus, the country's net international asset position increases
correspondingly. Equally, a deficit decreases the net international assetposition. The trade balance is identical to the difference between a country'soutput and its domestic demand (the difference between what goods acountry produces and how many goods it buys from abroad; this doesnot include money re-spent on foreign stocks, nor does it factor theconcept of importing goods to produce for the domestic market).Measuring the balance of payments can be problematic because of problems with recording and collecting data. As an illustration of thisproblem, when official data for all the world's countries are added up,exports exceed imports by a few percent; it appears the world isrunning a positive balance of trade with itself. This cannot be true,because all transactions involve an equalcreditordebitin the account of each nation. The discrepancy is widely believed to be explained bytransactions intended to launder money or evade taxes, smuggling andother visibility problems. However, especially for developed countries,accuracy is likely.Factors that can affect the balance of trade figures include:
Prices of goods manufactured at home (influenced by the responsiveness of supply)
Trade agreementsor barriers
Other  tax, tariff and trademeasures
Business cycle at home or abroad.
 The balance of trade is likely to differ across the business cycle. Inexport led growth (such as oil and early industrial goods), the balanceof trade will improve during an economic expansion. However, withdomestic demand led growth (as in the United States and Australia)the trade balance will worsen at the same stage in the business cycle.Strong GDP growth economies such as theUnited States, theUnited Kingdom,AustraliaandHong Kongrun consistent trade deficits, as well as poorer countries also experiencing a lot of investment.Developed nations such asCanada, Japan, andGermanytypically run trade surpluses. China also has a trade surplus. A higher savings rategenerally corresponds with a trade surplus. Correspondingly, theUnited States with its negative savings rate consistently has high tradedeficits.
[edit] Economic impact
Modern economists are split on the economic impact of the tradedeficit with opponents viewing it as a long run drag on GDP and
employment with high social costs while proponents claim it is a sign of economic strength.
[edit] Against
Some economists believe that GDP and employment
can bedragged down by an over-large deficit over the long run.
 Those who ignore the effects of long run trade deficits may beconfusing the David Ricardo's principle of comparative advantagewithAdam Smith's principle of absolute advantage, specifically ignoringthat latter. The economistPaul Craig Robertsnotes that thecomparative advantageprinciples developed byDavid Ricardodo not hold where the factors of production are internationally mobile.
Free trade concepts presume free floating currencies; however, in thereal world, currencies such as China's are not free floating, while othersmay be manipulated by governments.Since thestagflationof the 1970s, the U.S. economy has beencharacterized by slower GDP growth. In 1985, the U.S. began itsgrowing trade deficit with China. Over the long run, nations with tradesurpluses tend also to have a savings surplus while the U.S. has beenplagued by persistently lower savings rates than its trading partnerswhich tend to have trade surpluses with the U.S. Germany, France, Japan, and Canada have maintained higher savings rates than the U.S.over the long run. In 2006, the primary economic concerns havecentered around: highnational debt($9 trillion), high non-bankcorporate debt ($9 trillion), high mortgage debt ($9 trillion), highfinancial institution debt ($12 trillion), high unfunded Medicare liability($30 trillion), high unfunded Social Security liability ($12 trillion), highexternal debt(amount owed to foreign lenders) and a seriousdeterioration in the United Statesnet international investment position (NIIP) (-24% of GDP),
hightrade deficits, and a rise inillegal immigration.
These issues have raised concerns amongeconomists and unfunded liabilities were mentioned as a serious problem facingthe United States in the President's2006 State of the Unionaddress.
[edit] Pro
 Those who defend deficits revert to explanations of comparativeadvantage. Buyers in the receiving country send the money back. Afirm in America sends dollars for Brazilian sugarcane, and the Brazilianreceivers use the money to buy stock in an American company. Thismay lead to profits leaving the U.S however as Americans may forfeitcontrol. Although this is a form of capital account reinvestment, it maynot be a liability on anyone in America.

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