MacroeconomicsScience and Technology
Trade Balances in Historical and International Context
The history of the U.S. current account balance in recent decades is presented in several different ways. [link] (a) shows the current account balance and the merchandise trade balance in dollar terms. [link] (b) shows the current account balance and merchandise account balance yet again, this time presented as a share of the GDP for that year. By dividing the trade deficit in each year by GDP in that year, [link] (b) factors out both inflation and growth in the real economy.
By either measure, the general pattern of the U.S. balance of trade is clear. From the 1960s into the 1970s, the U.S. economy had mostly small trade surpluses—that is, the graphs of [link] show positive numbers. However, starting in the 1980s, the trade deficit increased rapidly, and after a tiny surplus in 1991, the current account trade deficit got even larger in the late 1990s and into the mid-2000s. However, the trade deficit declined in 2009 after the recession had taken hold.
[link] shows the U.S. trade picture in 2013 compared with some other economies from around the world. While the U.S. economy has consistently run trade deficits in recent years, Japan and many European nations, among them France and Germany, have consistently run trade surpluses. Some of the other countries listed include Brazil, the largest economy in Latin America; Nigeria, the largest economy in Africa; and China, India, and Korea. The first column offers one measure of the globalization of an economy: exports of goods and services as a percentage of GDP. The second column shows the trade balance. Most of the time, most countries have trade surpluses or deficits that are less than 5% of GDP. As you can see, the U.S. current account is negative 3.1%, while Germany’s is positive 6.2%.
|Exports of Goods and Services||Current Account Balance|
Key Concepts and Summary
The United States developed large trade surpluses in the early 1980s, swung back to a tiny trade surplus in 1991, and then had even larger trade deficits in the late 1990s and early 2000s. As we will see below, a trade deficit necessarily means a net inflow of financial capital from abroad, while a trade surplus necessarily means a net outflow of financial capital from an economy to other countries.
In what way does comparing a country’s exports to GDP reflect how globalized it is?
GDP is a dollar value of all production of goods and services. Exports are produced domestically but shipped abroad. The percent ratio of exports to GDP gives us an idea of how important exports are to the national economy out of all goods and services produced. For example, exports represent only 14% of U.S. GDP, but 50% of Germany’s GDP
Canada’s GDP is $1.736 trillion and its exports are $447 billion. What is Canada’s export ratio?
Divide $447 billion by $1,736 trillion.
The GDP for the United States is $14.7 trillion and its current account balance is –$291 billion. What percent of GDP is the current account balance?
Divide –291 billion by $14.7 trillion.
Why does the trade balance and the current account balance track so closely together over time?
The trade balance is the difference between exports and imports. The current account balance includes this number (whether it is a trade balance or a trade surplus), but also includes international flows of money from global investments.
In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?
Critical Thinking Questions
If a country is a big exporter, is it more exposed to global financial crises?
If countries reduced trade barriers, would the international flows of money increase?
- Welcome to Economics!
- Choice in a World of Scarcity
- Demand and Supply
- Labor and Financial Markets
- The Macroeconomic Perspective
- Economic Growth
- The International Trade and Capital Flows
- Introduction to the International Trade and Capital Flows
- Measuring Trade Balances
- Trade Balances in Historical and International Context
- Trade Balances and Flows of Financial Capital
- The National Saving and Investment Identity
- The Pros and Cons of Trade Deficits and Surpluses
- The Difference between Level of Trade and the Trade Balance
- The Aggregate Demand/Aggregate Supply Model
- Introduction to the Aggregate Demand/Aggregate Supply Model
- Macroeconomic Perspectives on Demand and Supply
- Building a Model of Aggregate Demand and Aggregate Supply
- Shifts in Aggregate Supply
- Shifts in Aggregate Demand
- How the AD/AS Model Incorporates Growth, Unemployment, and Inflation
- Keynes’ Law and Say’s Law in the AD/AS Model
- The Keynesian Perspective
- The Neoclassical Perspective
- Money and Banking
- Monetary Policy and Bank Regulation
- Exchange Rates and International Capital Flows
- Government Budgets and Fiscal Policy
- The Impacts of Government Borrowing
- Macroeconomic Policy Around the World
- International Trade
- Globalization and Protectionism
- Introduction to Globalization and Protectionism
- Protectionism: An Indirect Subsidy from Consumers to Producers
- International Trade and Its Effects on Jobs, Wages, and Working Conditions
- Arguments in Support of Restricting Imports
- How Trade Policy Is Enacted: Globally, Regionally, and Nationally
- The Tradeoffs of Trade Policy
- The Use of Mathematics in Principles of Economics
- The Expenditure-Output Model