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Understanding the Evolution of Trade Deficits Report

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Updated: Dec 6th, 2021

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Understanding of the trade deficit growth originally lies in the essence of the concept of foreign trade. The difference in US imports and export is about $600 billion. The difference between the country’s exports and imports is called the trade balance. Over the past years, the U.S. trade deficit has attracted a great deal of attention in the mass media and among policymakers in Washington, DC.

It is emphasized that over the past 25 years, the trade deficit has tended to increase and become a more significant part of the total output of the U.S. economy, or U.S. gross domestic product (GDP). In the first quarter of 2005, the U.S. trade deficit reached a peak of 5.7 percent of GDP. Later, the trade deficit had decreased a bit due to the weakening of the US dollar, standing at 5.2 percent of GDP in the first quarter of 2007. However, the U.S.’s trade deficit of more than 5 percent of GDP is large both by historical standards and in comparison with other industrialized countries.

The origin of the deficit is in the mechanism of international trade. The USA sells less than it imports. This means that foreign companies prefer selling their products to the USA, as the return levels are expected to be higher. This originates the matter that foreigners may start doubting the ability of the U.S. to return its debts and will cease lending. Or that the cost of borrowing from foreigners will increase essentially.

Thus, the evolution of the trade deficits originates the issue of the US economy weakening, nevertheless, the difference in import and export empowers the financial stability of the USA.

Critique

Economists emphasize that analyzing the trade balance is necessary to take into account all the factors, which influence the economic stability and financial strength of the national currency. The current paper pays enough attention to macroeconomic factors, nevertheless, it almost does not touch upon the microeconomic factors, and however, these factors are not less essential.

As for the matters of market elasticity, the analysis, provided by the authors is serious and overall. Though, the authors do not take into account the factor of relative elasticity, which is used for analyzing the stable and not very stable markets, formed mainly by elastic goods.

The evolution of trade deficit is explained clearly and logically, though, it is necessary to highlight that there are some demerits in representing the flows of forming the national debt and trade deficit. Thus, the long-run US import elasticities table does not represent the data on elasticity factor and investment of transnational companies that influence the elasticity essentially. On the other hand, the elasticity difference may be enough for the overall study of the trade deficit, and the factors that influence the development of this deficit.

The econometric model, which represents the relation of national income to imports, is generally aimed to assume the rates of incomes and price elasticity. Thus, it helps to analyze the market in comparison with the economic situation of the G-7 countries, and elaborate the means of trade deficit overcoming. On the other hand, there is no strong necessity to overcome and essentially decrease the trade deficit, as it directly influences the market stability.

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IvyPanda. "Understanding the Evolution of Trade Deficits." December 6, 2021. https://ivypanda.com/essays/understanding-the-evolution-of-trade-deficits/.

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IvyPanda. 2021. "Understanding the Evolution of Trade Deficits." December 6, 2021. https://ivypanda.com/essays/understanding-the-evolution-of-trade-deficits/.

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IvyPanda. (2021) 'Understanding the Evolution of Trade Deficits'. 6 December.

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