Trade Imbalance
Continuos significant trade deficit-> economic problems
-money paid for imports>money earned from exports-> loss of money from economy = less money spent on domestic goods/services -> domestic firms face fall in demand = cut back production/reduce demand for labour -> higher unemployment.
Continuos significant trade deficit-> economic problems
- More currency supplied to pay for import then total exports-> value of exchange rate will fall-> imports more expensive for domestic consumers -> imported inflation!
Problems with trade surplus
- Political/economic pressure on the gov't to reduce trade surplus so they can reduce trade deficits. - Increase in income from exports may-> demand push inflation, when spent in domestic econ. - Trade balance surplus->demand for national currency increases-> value of currency will rise. Increase of exports in international markets= result in falling demand+job losses.
Ways to correct large/persistent trade imbalance:
Introduce trade barriers
To Correct a trade surplus
Lower interest rates: Lowers cost of borrowing thus encouraging increased spending on imports.
Ways to correct large/persistent trade imbalance:
Nothing, floating exchange rate should fix it. Self correcting if exchange rate allowed to adjust freely. Trade deficit= more currency used to pay imports>demand for exports-> value of exchange rate will fall. Importing= expensive; exports sold overseas-> cheaper-> domestic demand for imports will decrease and overseas demand for exports will increase until trade imbalance reached at new lower equilibrium exchange rate.
To Correct a trade surplus
Nothing, floating exchange rate should fix it. Self correcting if exchange rate allowed to adjust freely. Trade surplus= more currency demanded overseas for exports>supply in payment for imports-> value of exchange rate will rise. Importing= cheaper; exports will become expensive-> domestic demand for imports will increase and demand for exports will decrease until trade imbalance reached at new higher equilibrium exchange rate.
Ways to correct large/persistent trade imbalance:
Raise interest rates. Will attract more inward investment to offset trade deficit by raising interest rates. Higher interest rates= borrowing more expensive and reduce spending on imports.
To Correct a trade surplus
Remove trade barriers
Large & Growing Trade Deficit
Symptom of slow/negative economic growth and declining industrial base. Fewer firms = fewer production of products for exports/less competition for imports= increased unemployment/decreased incomes.
Ways to correct large/persistent trade imbalance:
Use contractionary fiscal policy: Cut public expenditure and raise taxes to reduce demand in economy so people have less to spend on imports = will reduce trade deficit. Fall may affect domestic firms who may cut output and employment.
To Correct a trade surplus
Use expansionary fiscal policy: increasing public spending + lowering taxes boosting total demand in economy (esp. for imported goods/services)
Growing trade deficit
may be sign of economic expansion/recovery in an economy as people/firms increase spending on goods/services.
Continuos significant trade deficit-> economic problems
paying for annual deficits = country borrowing money from overseas aid-> total debt will rise & more income used to pay interest charges->= increase amount of money flowing out of an economy & reduce overtime the amount money it has to invest in new productive activities/spend on domestically produced products= harm to economic growth.
