National Income

Accounting and the Balance of

Payments
Chapter 13
• The American trade deficit broke the $600 billion barrier in 2004,
soaring to $617.7 billion, the Commerce Department reported on
Thursday, but the gap narrowed in December in part because sharply
lower oil prices cut the cost of energy imports.

• The deficit now accounts for more than 5 percent of the American
economy, a level that adds further pressure to forces pushing down the
value of the dollar and increases the amount of debt held overseas.

• For December, the gap between American exports and imports of goods
and services fell 4.9 percent, to $56.4 billion, down from a revised
deficit of $59.3 billion in November. The November deficit was originally
reported at $60.3 billion.
• Domestic manufacturers, labor unions and many Democrats say the
huge trade deficit reflects the erosion of the American manufacturing
base and a concurrent loss of jobs. The annual report showed that the
United States lost ground last year, not only in manufacturing but also
in advanced technology products and services, two of the country's
strongest sectors.

• The deficit in technology products grew to $37 billion last year while
the surplus for services, including banking, insurance and investment,
shrank to $48.5 billion, the lowest since 1991.
• The Bush administration, by contrast, views the deficit through a
different lens. Treasury Secretary John W. Snow said through a
spokesman that the report showed that the American economy was
growing faster than the economies of other advanced industrial nations.
The imbalance, he said, reflects the ability of American consumers to
buy more imports.

• Officials also contend that the gap has widened because foreigners are
eager to invest in the United States; the extra funds flowing in are one
consequence of the growing dollars flowing out to pay for imports.
• ''We are importing more than those other economies, because we are
creating more disposable income than they are,'' said Rob Nichols,
chief spokesman at the Treasury Department. The annual deficit with
China set a record at $162 billion, becoming the largest trade
imbalance ever recorded by the United States with a single country.
Democrats in Congress seized on the figure to repeat their demands
that the administration push China to revalue its currency, which is
blamed for the poor performance of American exports.
• ''I am tired of watching ships arrive at the Port of Baltimore filled with
cargo for U.S. consumers and then leave empty,'' said Representative
Benjamin L. Cardin of Maryland, the ranking Democrat on the trade
subcommittee of the House Ways and Means Committee.

• He said that five out of six ships delivering goods to the United States
from China return home empty. And those with cargo are often
carrying waste material, scrap metal or recyclable paper that are
among the fastest-growing American exports to China.
• American textile manufacturers and the biggest business
organizations have asked the administration to bring China to the
World Trade Organization for unfair trading practices that they say are
adding to the trade deficit.

• Peter Morici, professor of business at the University of Maryland, said

the deficit was the ''single most important tax on U.S. growth and
burden on American working families.''
• Most of the other advanced industrial economies, including Germany,
Japan and Canada, have overall trade surpluses, according to figures
compiled by the International Monetary Fund. To help bring global
trade into better balance, economists said, these wealthy nations
would need to buy more American goods and services. At the same
time, adjustments in the value of the dollar, especially with China,
which fixes its currency against the dollar, are required to ease that
process, they said.
• As for the narrowing trade gap in December, some economists said
the decline was mostly a result of the declining volume and cost of
imported oil that month, while others pointed to the fall of the dollar,
which makes American exports more attractive overseas.

• ''There is hope,'' said Joel L. Naroff, president of Naroff Economic

Advisors. ''We could be seeing some narrowing in the deficit this year
and that should add to growth.’’

• Dan Griswold, director of the Center for Trade Policy Studies at the
Cato Institute, dismissed what he called ''alarmist concerns about the
size of the trade deficit.’’
• He saw welcome news in the increase in exports in 2004 to $1.146 trillion,
a figure that surpassed the previous peak set in 2000. Imports into the
United States hit $1.764 trillion, or 54 percent more than exports.

• But the recent decline in the dollar also indicates that private foreign
lenders may be less willing to supply new credit to underwrite the deficit.

• The 2004 deficit is 24.4 percent deeper than the gap in 2003, which had
set the previous record with a deficit of $496 billion.
Questions
1. The trade deficit has set a new record in 2004, "soaring to
$617.7 billion." Why does this also imply that there was record
borrowing from foreigners by Americans in 2004?
Answer:
From the balance sheet;
Assets=Liabilities+Shareholders’ Equity
CA+KA=0 ;
Current account (CA) and Capital and Financial Account (KA)
(X-M)+KA=0
KA=-(X-M)
KA>0
• The trade deficit of $617.7 billion in 2004 implies that Americans needed to borrow a significant amount of money from
foreigners to finance their excess imports. To understand why this implies record borrowing from foreigners, we can look at the
balance sheet, current account, imports, and exports.
• The balance sheet of a country records its financial transactions with the rest of the world. It consists of two main components:
the current account and the capital account. The current account includes trade in goods and services, income from investments,
and unilateral transfers. The capital account includes financial flows such as investment and borrowing.
• In the case of the United States in 2004, the record trade deficit of $617.7 billion means that the value of goods and services
imported exceeded the value of goods and services exported by that amount. This deficit is reflected in the current account
balance, which would show a deficit of $617.7 billion.
• To finance this deficit, Americans needed to borrow money from foreigners. This borrowing is recorded in the capital account of
the balance sheet. It represents financial inflows from foreign lenders, such as investments in U.S. Treasury bonds, corporate
bonds, or other financial instruments.
• So, the record trade deficit in 2004 implies that Americans had to borrow a significant amount of money from foreigners to
cover the excess of imports over exports. This borrowing is reflected in the capital account of the balance sheet as a financial
inflow from foreign lenders.
• In summary, the trade deficit indicates an imbalance between imports and exports, which is reflected in the current account
balance. To finance this deficit, Americans had to borrow money from foreigners, leading to record borrowing from overseas
lenders. This borrowing is recorded in the capital account of the balance sheet.
2. "Domestic manufacturers, labor unions and many
Democrats say the huge trade deficit reflects the erosion of the
American manufacturing base and a concurrent loss of jobs."
Do you agree with this claim?
Answer:
I disagree, because trade deficit doesn’t effect the unemployment rate. However, there are 5
factors that cause the trade deficit which are
1. Production rate y=f(N,K)
2. Labor force (N)> unemployment rate can found
3. Inflation rate (P)
4. Interest rate (R)
5. Exchange rate (E)
So that, the unemployment rate cause the trade deficit.
• The claim suggests that the significant trade deficit reflects the erosion of the American manufacturing base and a concurrent
loss of jobs. This viewpoint is based on the belief that a large trade deficit indicates an imbalance between imports and
exports, with imports outweighing exports. According to this perspective, the high volume of imports is seen as a result of
the decline in American manufacturing competitiveness, leading to job losses in the manufacturing sector.
• There are differing opinions on this matter among economists and policymakers. Some argue that the trade deficit is
primarily a result of structural factors such as differences in labor costs, productivity levels, and comparative advantages
among countries. They contend that blaming the trade deficit solely on domestic manufacturing erosion oversimplifies the
complex dynamics of global trade.
• Others, however, assert that the trade deficit does have a detrimental effect on the manufacturing base and employment. They
argue that a persistent trade deficit can lead to the displacement of domestic industries, as imported goods compete with
domestically produced goods, potentially resulting in job losses in certain sectors.
• It is important to note that the relationship between the trade deficit, manufacturing base, and employment is multifaceted.
Economic factors, technological advancements, global supply chains, and government policies all contribute to the dynamics
of the trade deficit and its impact on domestic industries and jobs.
• In summary, while some stakeholders attribute the trade deficit to the erosion of the American manufacturing base and job
losses, this claim is subject to debate. The complex nature of global trade makes it challenging to attribute the trade deficit
solely to one factor. Multiple factors influence the trade deficit, and its impact on the manufacturing base and employment is
a complex and nuanced issue.
3. According to the Secretary of Treasury, "the American
economy was growing faster than the economies of other
advanced industrial nations. The imbalance...reflects the ability
of American consumers to buy more imports." Do you agree
with this claim?

Answer:
• I agree with this claim, importing the material from other countries in
order to product the goods in US and then export them to other
countries also will add value to the goods.
• The claim made by the Secretary of Treasury, John W. Snow, suggests that the trade deficit reflects the
strength of the American economy and the ability of American consumers to purchase more imports.
This perspective implies that the trade deficit is not necessarily a negative indicator but rather a
consequence of the United States' economic growth compared to other advanced industrial nations.
• There are differing viewpoints on this matter. Critics argue that a persistent trade deficit may reflect
underlying issues such as a decline in domestic manufacturing and job losses. They believe that the trade
deficit is a sign of an unbalanced economy and reliance on foreign production.
• It's important to note that the causes and consequences of trade deficits are complex and multifaceted.
Economic factors, including exchange rates, global supply chains, domestic consumption patterns, and
competitiveness of domestic industries, all play a role in shaping trade imbalances. Assessing the impact
of trade deficits on the overall economy requires a comprehensive analysis of various factors.
• Ultimately, whether you agree with the claim or not depends on your understanding of the factors
influencing trade imbalances and your perspective on the implications of a trade deficit for the American
economy.
4. "Pete Morici, a professor of business at the University of
Maryland, said the deficit was "the single most important tax
on U.S. growth and burden on American working families." Is
this the right way to think about the trade deficit?

Answer:
• I don’t think it’s the right way.
• a trade deficit-> the value of the dollar will decrease-> purshasing
power of the US citizen will be less -> the government cannot get
much tax because US citizen does not have money
• The statement made by Peter Morici, the professor of business at the University of Maryland, reflects his
perspective on the trade deficit as being a significant burden on U.S. growth and American working families.
However, it's important to note that opinions on the trade deficit can vary among economists and experts.
• Some economists argue that a large and persistent trade deficit can have negative consequences for an
economy. They suggest that it may indicate a structural imbalance, such as a decline in domestic
manufacturing or competitiveness, and can lead to job losses in certain industries. They view the trade deficit
as a drain on domestic demand and a potential risk to long-term economic stability.
• On the other hand, some economists believe that focusing solely on the trade deficit may oversimplify the
complexities of international trade and its impact on the economy. They argue that trade deficits can be
influenced by various factors, including exchange rates, domestic consumption patterns, and global supply
chains. Moreover, they suggest that trade deficits can also be offset by positive factors such as foreign
investment inflows or the attractiveness of American exports.
• Ultimately, the assessment of the trade deficit and its impact on the economy is a complex issue with differing
viewpoints. It involves considering a range of economic factors and understanding the broader context of
international trade dynamics.
5. Should the trade deficit add "further pressure to forces
pushing down the value of the dollar"?

Answer:
I don’t think its about the trade dificit that makes the value goes up or goes down.
It’s the value of the dollar that makes trade deficit.
• If the value of the dollar decrease, US will be able to export more and import rate
will decrease
• On the other hand, if the value of the dollar increase, US will be able to export less
and import rate will increase.
• The trade deficit can have implications for the value of the dollar, but it's important to understand the dynamics
involved. When a country has a trade deficit, it means that it imports more goods and services than it exports,
resulting in a net outflow of currency. This can put downward pressure on the value of the domestic currency, in
this case, the dollar.
• A depreciating currency can have both positive and negative effects. On one hand, it can make exports more
competitive and attractive to foreign buyers, potentially leading to an increase in exports. On the other hand, it can
make imports more expensive, which can contribute to inflationary pressures and affect consumers' purchasing
power.
• In the context of the statement you provided, the trade deficit exceeding $600 billion in 2004 added to the pressure
on the value of the dollar. The trade deficit can contribute to a weakened currency because of the increased demand
for foreign currencies to pay for imports.
• However, it's important to note that the value of the dollar is influenced by various factors, including interest rates,
monetary policy, investor sentiment, and geopolitical developments. The trade deficit is just one factor among
many that can affect the value of a currency.
• In summary, while the trade deficit can contribute to downward pressure on the value of the dollar, it's not the sole
determinant of currency fluctuations, and other factors also play a significant role in shaping the currency's value.