This project briefly explains the following sections.

1.1. Is U.S. ok with it's trade deficit ?

1.2 Self test Questions

1.2.1 Briefly explain how changes in various economic factors affect the U.S. current
account balance.

1.2.2 Explain why U.S. tariffs may change the composition of U.S. exports but will
necessarily reduce a U.S. balance-of-trade deficit.

1.2.3 Explain how the Asian crisis affected trade between the United States and Asia.

Section 1.2

In this section I have briefly explained whether United States should be concerned with it’s long-
running trade deficit or is it ok for U.S.
United States is consistently running a trade deficit since 1980 and recorded a trade deficit of
$621 billions in 2018. The president of U.S. Donald Trump has listed it as a top priority to
reduce this trade deficit and create more jobs in the country. This shows that U.S. administration
is concerned about it’s trade deficit and certainly not ok with it at the current. But is having a
trade deficit harmful for U.S. ? What are some pros and cons for U.S. having a trade deficit ?
Both of these questions are answered briefly in following section.
If U.S. administration decides that we are not ok with our trade deficit, as they’re not, they will
have to start producing domestically the goods they import from rest of the world which will
result in lower unemployment rate. Moreover, if the domestic consumers, government, and firms
decide to purchase the local goods that will also contribute in incrementing the revenues. Both
of these factors will result in an increase in the national income of U.S.
But that is not the characteristics of a country which is considered as the super power and
whose currency is the world’s reserve currency. To maintain this image, U.S. must engage In
international trade offering more access to it’s USD which makes it easier for the international
firms to invest in U.S. securities. U.S. sends more than $200 billion in payments to the
international market which creates more competition and keeps the prices low and results in
many new jobs not only In specialized sectors in U.S. but in international market as well. USD,
being the world’s reserve currency, also reduces the relative cost of goods for U.S. due to it’s
higher value.
So in my personal opinion, having a trade deficit is not harmful for U.S. although it may create a
trade deficit but there are other determinants as well which can offset this imbalance. Such
factors are inflation, exchange rates and growth etc. America is also one of the world’s leader in
economic system so it is no harm for U.S. to engage in international trade.

Section 1.2

1.2.1 There are several factors that determine the balance of current account. U.S. imports
more, creating a trade deficit, but that is not the only determinant . There are other factors which
also can affect the current account.
1- Inflation
2- National Income
3- Exchange rates
4- Government policies

1- Inflation
A high inflation rate in U.S. as compared to other countries can lead towards a
decreased demand for it’s goods and services in international market as well as in
domestic market. This can lead to increased Importing activities creating a more
negative Impact on it’s current account. Similarly, having lower inflation rate, U.S. current
account deficit may decrease as the demand for it’s good and services will increase in
international market as well as in domestic market.

2- National income
An increase in the national income of U.S. will lead to higher amount of aggregate
spending ultimately increasing the demand for consumable goods i.e. Importing activities
will increase resulting a more negative current account balance. Similarly a relatively
lower increase will have reverse effect on Current account.

3- Exchange rates
A weak U$D tends to make U.S. products cheaper to non U.S. firms and makes
non-U.S. products expensive to U.S. firms. Thus, U.S. exports are expected to
increase, while U.S. imports are expected to decrease. However, In some cases a
stronger dollar causes U.S. exports to decrease and U.S. imports to increase because
it makes U.S. goods more expensive to non-U.S. firms and makes non-U.S. goods less
expensive to U.S. firms.

4- Government policies
 When U.S. Or any other government, trading with U.S. l, imposes some restrictions like
higher tariffs and import quotas etc. It might have a positive effect on the current account
of U.S. (less negative).

1.2.2 The effect of imposing higher tariffs may be offset. When U.S imposes tariffs on foreign
imported goods or exported goods, other countries trading with U.S. may response the same
way offsetting the effect on current account.

1.2.3 During the Asian crisis of 1997-98, the exchange rates of Asian countries declined
against U$D and their income level also decreased. This created an increase in demand for
their goods in international market against U.S. goods. As a result, some of the U.S importers
discontinued their relationships with the Asian firms.