Respond to at least two of your fellow students’ and to your instructor’s posts in a substantive manner and provide information or concepts that they may not have considered. Each response should have a minimum of 100 words and ask the student a question about their post.
Exchange rate: This is currency transactions between countries. The price of a particular currency is determined based on the open market. And the open market is where things are bought and sold. These exchange rates can affect the Purchasing Power of that currency. These are the number of goods or services that can be purchased with a unit of currency.
The balance of payments: This is the summary of transactions of the country’s citizens, business, and governments with foreigners, and are based on basic bookkeeping. This is primarily tracked as either a debit or credit against an account.
Trade Deficits are bad:
I am taking this position to start an argument. In reality deficits are not bad, and do not take into an account of all the other transactions that take place after the initial purchase. Take Steel for instance. A roll of steel goes into cans. These go into paints, houses, and buildings. These are then sold to customers whom may sell them to another party. There are multiple transactions past the original point of sale. This is what isn’t recorded.
So, why do I think they are bad. I would state, it depends on who it is with. This is more geopolitical but there is a point. China has taken great strides to subsidize its industries to help undercut competition to increase exports. The industries are then unable to compete and are bought out by China (yes the government, they are socialist). This has allowed them to monopolize segments of trade. China currently controls 90% of all global rare earth production. This means they can control the price, and not the free market. The secondary effects are these metals go into manufacturing of our weapons, computers and even cars. By seeding these completely to a hostile state actor, we put ourselves at risk not to mention the rest of the world.
Ok that is doom and gloom: But the point is by allowing aggressive trade deficits from hostile governments will restrict trade and effect more than just the trade of new sneakers.
At first glance, a trade deficit may seem to be a bad thing. Lastrapes (2020) noted that “more than two-thirds think the U.S. should take steps to reduce the trade deficit with China, even if a resulting trade war drives up consumer prices” (p. 1). The appearance is if there is a deficit, then the United States is at a disadvantage. However, when exploring comparative advantage, a country has a comparative advantage when producing a product or service more cheaply than others. So, policies that try to reduce trade deficits hamper trade and work against the likely gains from comparative advantage. When Americans purchase more goods and services, the result is money flows out of the U.S. to the country, which sounds terrible. However, those countries now have the extra capital that can be invested in opportunities in the U.S. Money that flows out will flows back in to aid in productive investment. Lastrapes (2020) illustrates, “In 2017, Americans bought about US$552 billion more goods and services from abroad than foreigners purchased from the U.S. But foreigners sent about that amount right back to the U.S. to help American businesses build factories, create jobs, and increase growth” (p. 1).
Therefore, trade deficits allow international capital markets to work, motivated by regular market forces, and reproduce good borrowing and lending across the globe. In a well-functioning economy, trade deficits can be better than imposing tariffs and restraining trade policies.