balance of trade

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The largest component of a country's balance of payments. It is the difference between exports and imports. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus.

Investopedia Says:
The balance of trade is one of the most misunderstood indicators of the U.S. economy. For example, many people believe that a trade deficit is a bad thing. However, whether a trade deficit is bad thing or not is relative to the business cycle and economy. In a recession, countries like to export more, creating jobs and demand. In a strong expansion, countries like to import more, providing price competition, which limits inflation and, without increasing prices, provides goods beyond the economy's ability to meet supply. Thus, a trade deficit is not a good thing during a recession but may help during an expansion.

Related Links:
Countries track money coming in and going out through something called the balance of payments. Learn more here. What Is The Balance Of Payments?
Learn how a country's current account balance reflects the country's economic health. Understanding The Current Account In The Balance Of Payments
Find out what it means when more funds are exiting than entering a nation. Current Account Deficits
The WTO sets the global rules of trade. But what exactly does it do and why do so many oppose it? What Is The World Trade Organization?

Net difference over a period of time between the value of a country's imports and exports of merchandise. Movable goods such as automobiles, foodstuffs, and apparel are included in the balance of trade; payments abroad for services and for tourism are not. When a country exports more than it imports, it is said to have a favorable balance of trade; when imports predominate the balance is called unfavorable. The balance of trade should be viewed in the context of the country's entire international economic position, however. For example, a country may consistently have an unfavorable balance of trade that is offset by considerable exports of services; this country would be judged to have a good international economic position. See also Balance of Payments.

Even though the United States has many natural resources and the ways and means to use them in manufacturing, it cannot provide its people with all that they want or need. For this reason, the United States participates in international trade, which is the exchange of goods and services with other nations. Without international trade, goods would either cost more or not be available.

Throughout the world, there are substantial differences in the natural resources available. For example, Canada, with its huge forests, is a major producer of lumber and paper products; the Middle East has rich oil reserves; and the coastal regions of the world are leaders in the fishing industry.

Without international trade, each country would have to be totally self-sufficient. Each would have to make do only with what it could produce on its own. This would be the same as an individual being totally self-sufficient, providing all goods and services, such as clothing and food, that would fulfill all wants and needs. International trade allows each nation to specialize in the production of those goods it can produce most efficiently. Specialization, in turn, causes total production to be greater than it would be if each nation tried to be self-sufficient.

Goods and services sold to other countries are called exports; goods and services bought from other countries are called imports. The U.S. Bureau of the Census, Foreign Trade Division, indicates that U.S. exports include such goods as corn, wheat, soybeans, plastics, iron and steel products, chemicals, and machinery, while imports include such goods as chemicals, crude oil, machinery, diamonds, and coffee.

The balance of trade is the difference between the dollar amount of exports and the dollar amount of imports. The United States has many trade partners. Table 1 shows the U.S. balance of trade with three selected nations.

In order to have a trade surplus, a country must export (sell) more than it imports (buys). The opposite of a trade surplus is a trade deficit. This occurs when a country imports (buys) more than it exports (sells). As can be seen from Table 1, a country can have a trade surplus with one country and a trade deficit with another. The Bureau of the Census records indicate that for the month of November 1998 the United States had a trade surplus with such countries as Saudi Arabia, the Netherlands, Australia, and Brazil. During the same month, the United States had a

United States Trade with Selected Countries, 1998

trade deficit with such countries as Japan, China, Canada, and Mexico.

The Bureau of the Census also reports that the United States experienced its first trade deficit (total of all exports minus total of all imports) of the twentieth century in 1971, with a trade deficit of approximately $1.5 billion. A record high trade deficit occurred in 1998, when imports exceeded exports by approximately $230 billion. Table 2 shows the U.S. balance of trade for the years 1960 through 1998. As can be easily seen in the table, the U.S. trade deficit continues to increase.

As stated earlier, total production increases when a nation specializes in the production of those goods it can produce most efficiently instead of attempting to be totally self-sufficient. Allen Smith (1986), states that "a country that can produce a product more efficiently than another country is said to have an absolute advantage in the production of that product" (p. 315). When a nation can use fewer resources to produce the same amount of a product, it has an absolute advantage in the production of that product. For example, Brazil has an absolute advantage over the United States in the production of coffee, and the Middle East has an absolute advantage over the United States in the production of crude oil. Because of its ideal climate, Ecuador can produce bananas more efficiently than the United States; therefore, Ecuador has an absolute advantage over the United States in the production of bananas. However, the United States has an absolute advantage over Ecuador in the production of most products. Both nations benefit by trading those products that each nation can produce more efficiently. Nations usually will not trade with other nations unless there are gains to be made by each nation. However, the gains made will not necessarily be equal.

Smith (1986) also states that "any time a nation has an absolute advantage in the production of two goods or services, the nation has a comparative advantage in the production of that good or service where the absolute advantage is greater" (p. 315). In other words, if a nation has a two-to-one absolute advantage in the production of one product and a three-to-one absolute advantage in the production of another product, the comparative advantage lies with the product with the larger ratio. Smith (1986) also states that "even though a nation has an absolute disadvantage in the production of two products, it has a comparative advantage in the production of that product in which the absolute disadvantage is less" (p. 316). For example, even though a nation has a disadvantage in the production of a certain product, if that disadvantage is small compared to its disadvantage in the production of other products, it still has a comparative advantage with the former product.

When the United States buys goods from another country, it usually pays for the goods in the currency of the exporting country. There are many transactions that involve the exchange of money between nations. The balance of payments is an accounting record of the difference

Trade Balance
Goods on a Census Basis
VALUE IN MILLIONS OF DOLLARS
1960 THRU 1998

between the amount of money that a country receives and the amount of money that it pays out during a year. A positive balance of payments means that a country receives more money in a year than it pays out. Likewise, a negative balance of payments occurs when a country pays out more money than it takes in. Any transaction that involves payments between countries is included in the balance of payments. The largest component of the balance of payments is the balance of trade, but many more financial transactions are included, such as foreign aid to other nations, government support of military personnel stationed in other nations, and money spent by tourists.

The importing and exporting of goods and services are controlled by the U.S. government. Three of the most common barriers to trade are tariffs, import quotas, and embargoes. A tariff is a tax imposed by the government on imported goods. An import quota places a limit on the amount of a product that may be imported or exported during a given period of time. An embargo occurs when the government halts the import or export of a certain product.

Bibliography

Gottheil, Fred M., and Wishart, David. (1997). Principles of Economics with Study Guide. Cincinnati: South-Western College Publishing.

Smith, Allen W. (1986). Understanding Economics. New York: Random House.

U.S. Bureau of the Census, Foreign Trade Division. http://www.census.gov/foreign-trade/site1/1998.

[Article by: LISA S. HUDDLESTUN]

Trade balances are the financial flows that arise from trade in goods and services and unilateral transfers between countries. These financial flows constitute a portion of a country's current account. The balance of trade is measured by the dollar value of payments and receipts for goods and services.

Overview

From 1815 to 1934, U.S. governments generally enacted policies that limited imports of manufactured goods, in the interest of protecting domestic producers. Trade balances were generally negative until the United States emerged as an industrial power in the 1870s. Notwithstanding the improving competitive position of U.S. manufacturers, reflected in surging trade surpluses, high tariffs remained in place until the Smoot-Hawley tariff of 1930 brought protectionism into disrepute.

The administration of President Franklin D. Roosevelt adopted a freer trade position with the passage of the Reciprocal Trade Agreements Act in 1934. In the context of growing surpluses in the trade of merchandise goods, the United States played a leading role in liberalizing trade after World War II (1939–1945). Persistent and growing trade deficits from the 1970s on prompted successive administrations in Washington to pursue "strategic" trade policies that retreated selectively from the free trade position of the early postwar period. Despite the concessions to so-called fair trade, U.S. governments remained biased toward freer trade, despite the large and growing trade deficits of the 1980s and 1990s.

Economists generally frown on the idea that trade surpluses are better than deficits and believe that policies that suppress imports invariably reduce exports in the long run. With the growth of the trade deficit, concern over jobs and the means to service trade balances have prompted calls for policy changes that redress the imbalance among exports and imports. At the end of the twentieth century, however, public policy expressed little concern regarding the trade deficit.

From Colonialism to World War I

The thirteen American colonies ran persistent trade deficits with Great Britain from 1721 to 1772. Surpluses with other countries reduced the overall deficit somewhat. Yet from 1768 to 1772, colonial exports totaled £2.8 million, while imports equaled £3.9 million. There were significant regional differences. As of 1770, for instance, Georgia, Maryland, Virginia, and the Carolinas maintained a roughly even trade balance with Britain on the strength of staple crop exports. At the same time, the Mid-Atlantic and New England colonies ran significant deficits. They serviced them with earnings from shipping and other mercantile services, in which New York and Philadelphia excelled, and exports of primary and semi-processed products.

The new American nation maintained imports of British manufactured goods. American producers benefited from the Napoleonic Wars (1803–1815); in 1807, they were exporting three times more goods than they had exported in 1793. From 1807 to 1830, British protectionism and a growing U.S. economy produced growing trade deficits, as manufacturing imports soared, while Britain kept its markets closed to U.S. finished goods. However, British demand for cotton soared during the mid-nineteenth century, and exports of the staple crop constituted half of America's total exports in the two decades prior to the Civil War (1861–1865). From 1791 to 1850, America's merchandise trade balance was in a deficit for all but eight years. At the same time, the volume of U.S. exports increased more than sevenfold, from $19 million in 1791 to $152 million in 1850. When services are included, the trade balance was in surplus for nineteen of the sixty years between 1791 and 1850.

From 1850 through the end of World War I (1914–1918), America's trade balance moved from slightly unfavorable to enormously favorable, reflecting the nation's emergence as a world economic power and the continuation of trade protectionism. Thus, from 1850 to 1873, the merchandise trade deficit totaled $400 million, as exports grew from $152 million to $524 million. From 1874 to 1895, the trade balance turned favorable on the strength of agricultural exports and increases in shipments of manufactured goods. Volume increased steadily as well, with exports of goods and services reaching $1 billion for the first time in 1891. From 1896 to 1914, the trade balance was markedly favorable, as U.S. manufacturers competed globally for markets. Indeed, the merchandise trade balance was some $9 billion in surplus for this period. Purchases of services reduced the overall trade surplus to $6.8 billion. Spurred by the European demand for U.S. goods and services during World War I, the U.S. trade surplus soared from 1915 to 1919. Net goods and services totaled $14.3 billion for the five-year period, with exports topping $10.7 billion in 1919—an amount that was not exceeded until World War II (1939–1945). Not incidentally, America also became a creditor on its current account for the first time, on the strength of lending to wartime allies Britain and France.

From World War II to the Twenty-First Century

During the interwar period, the U.S. trade balance was consistently in surplus on greatly reduced volumes of trade, even as the merchandise trade balance turned negative from 1934 to 1940. As was the case during World War I, U.S. exports soared during World War II, peaking at $21.4 billion in 1944. Much of this volume was owed to the lend-lease program. As a result, America enjoyed an enormously favorable balance of trade, which it sustained during the early postwar period, from 1945 to 1960.

The favorable trade position of the United States at the end of World War II, underpinned by the relative strength of its manufacturing sector, contributed to the willingness of U.S. administrations to liberalize the global trading regime through the General Agreement on Tariffs and Trade and its successor, the World Trade Organization. Both Democratic and Republican administrations remained committed to a freer trade policy stance—de-spite many exceptions, most notably steel, autos, and semiconductor chips—even as the U.S. merchandise trade balance disappeared in the late 1960s and then turned negative in the context of growing competitiveness on the part of European and Japanese manufacturers and sharply increased prices for crude oil.

From 1984 to 2000, the merchandise trade balance topped $100 billion in all but the recession years of 1991 and 1992, even as trade volumes increased absolutely and relative to GNP. In 1997, it exceeded $200 billion, as exports nearly reached $900 billion and GNP hit $8 trillion for the first time. For the twelve months ending 31 December 2001, the merchandise trade deficit stood at $425 billion. A surplus in services, which grew from $6.1 billion in 1980 to $85.3 billion in 1997, has offset 30 to 40 percent of the deficit on goods. America has funded its trade deficit largely by attracting foreign investment, so that it runs large surpluses on its capital account. As a result, the United States became the world's largest debtor on its current account during the 1980s and remained so at the beginning of the twenty-first century.

Bibliography

Balaam, David N., and Michael Veseth. Introduction to International Political Economy. Upper Saddle River, N.J.: Prentice Hall, 1996. See chapter 8.

Lovett, William A., Alfred E. Eckes Jr., and Richard L. Brink-man. U.S. Trade Policy: History, Theory, and the WTO. Armonk, N.Y.: M. E. Sharpe, 1999.

Thompson, Margaret C., ed. Trade: U.S. Policy Since 1945. Washington, D.C.: Congressional Quarterly, 1984.

U.S. Department of Commerce. Historical Statistics of the United States: Colonial Times to 1970. Washington, D.C.: General Printing Office, 1975.

Walton, Gary M., and Hugh Rockoff. History of the American Economy. 8th ed. New York: Harcourt, Brace, 1998.

—Michael R. Adamson

That part of the balance of payments relating to goods only (as opposed to services, monetary movements, official reserve transactions, etc.).

The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going through the Panama Canal.

The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports.^[1] A favourable balance of trade is known as a trade surplus and consists of exporting more than is imported; an unfavourable balance of trade is known as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.

Contents 1 Definition 2 Views on economic impact 2.1 Conditions where trade deficits may be considered harmful 2.2 Conditions where trade imbalances may not be harmful 3 Milton Friedman on trade deficits 4 Warren Buffett on trade deficits 5 John Maynard Keynes on the balance of trade 6 Physical balance of trade 7 United States trade deficit 8 See also 9 Notes 10 External links

Definition

The balance of trade forms part of the current account, which includes other transactions such as income from the international investment position as well as international aid. If the current account is in surplus, the country's net international asset position increases correspondingly. Equally, a deficit decreases the net international asset position.

The trade balance is identical to the difference between a country's output and its domestic demand (the difference between what goods a country produces and how many goods it buys from abroad; this does not include money re-spent on foreign stocks, nor does it factor the concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems with recording and collecting data. As an illustration of this problem, when official data for all the world's countries are added up, exports exceed imports by a few percent; it appears the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely.

Factors that can affect the balance of trade include:

• The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy;
• The cost and availability of raw materials, intermediate goods and other inputs;
• Exchange rate movements;
• Multilateral, bilateral and unilateral taxes or restrictions on trade;
• Non-tariff barriers such as environmental, health or safety standards;
• The availability of adequate foreign exchange with which to pay for imports; and
• Prices of goods manufactured at home (influenced by the responsiveness of supply)

In addition, the trade balance is likely to differ across the business cycle. In export led growth (such as oil and early industrial goods), the balance of trade will improve during an economic expansion. However, with domestic demand led growth (as in the United States and Australia) the trade balance will worsen at the same stage in the business cycle.

Since the mid 1980s, United States has had a growing deficit in tradeable goods, especially with Asian nations (China and Japan) which now hold large sums of U.S debt that has funded the consumption.^[2][3] The U.S. has a trade surplus with nations such as Australia and Canada. The issue of trade deficits can be complex. Trade deficits generated in tradeable goods such as manufactured goods or software may impact domestic employment to different degrees than trade deficits in raw materials.

Economies such as Canada, Japan, and Germany which have savings surpluses, typically run trade surpluses. China, a high growth economy, has tended to run trade surpluses. A higher savings rate generally corresponds to a trade surplus. Correspondingly, the United States with its lower savings rate has tended to run high trade deficits, especially with Asian nations.

Views on economic impact

Economists are sometimes divided on the economic impact of the trade deficit.

Conditions where trade deficits may be considered harmful

Those who ignore the effects of long run trade deficits may be confusing David Ricardo's principle of comparative advantage with Adam Smith's principle of absolute advantage, specifically ignoring the latter. The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo do not hold where the factors of production are internationally mobile.^[4][5] Global labor arbitrage, a phenomenon described by economist Stephen S. Roach, where one country exploits the cheap labor of another, would be a case of absolute advantage that is not mutually beneficial.^[6][7][8]

Detiorating U.S. net international investment position (NIIP) has caused concern among economists over the effects of outsourcing and high U.S. trade deficits over the long-run.^[2]

Since the stagflation of the 1970s, the U.S. economy has been characterized by slower GDP growth. In 1985, the U.S. began its growing trade deficit with China. Over the long run, nations with trade surpluses tend also to have a savings surplus. The U.S. has been plagued by persistently lower savings rates than its trading partners which tend to have trade surpluses. Germany, France, Japan, and Canada have maintained higher savings rates than the U.S. over the long run.^[9] Some economists believe that GDP and employment can be dragged down by an over-large deficit over the long run.^[10][11] Wealth-producing primary sector jobs in the U.S. such as those in manufacturing and computer software have often been replaced by much lower paying wealth-consuming jobs such those in retail and government in the service sector when the economy recovered from recessions.^[5][12][13] Some economists contend that the U.S. is borrowing to fund consumption of imports while accumulating unsustainable amounts of debt.^[2][14]

In 2006, the primary economic concerns centered around: high national debt ($9 trillion), high non-bank corporate debt ($9 trillion), high mortgage debt ($9 trillion), high financial institution debt ($12 trillion), high unfunded Medicare liability ($30 trillion), high unfunded Social Security liability ($12 trillion), high external debt (amount owed to foreign lenders) and a serious deterioration in the United States net international investment position (NIIP) (-24% of GDP),^[2] high trade deficits, and a rise in illegal immigration.^[14][15]

These issues have raised concerns among economists and unfunded liabilities were mentioned as a serious problem facing the United States in the President's 2006 State of the Union address.^[15][16] On June 26 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much in some areas and can no longer rely on the financial sector and consumer spending to drive demand.^[17]

Conditions where trade imbalances may not be harmful

Small trade imbalances are generally not considered to be harmful to either the importing or exporting economy. However, when a national trade imbalance expands beyond prudence (generally thought to be several percent of GDP, for several years), adjustments tend to occur. While unsustainable imbalances may persist for long periods (cf, Singapore and New Zealand’s surpluses and deficits, respectively), the distortions likely to be caused by large flows of wealth out of one economy and into another tend to become intolerable.

In simple terms, trade deficits are paid for out of foreign exchange reserves, and may continue until such reserves are depleted. At such a point, the importer can no longer continue to purchase more than is sold abroad. This is likely to have exchange rate implications: a sharp loss of value in the deficit economy’s exchange rate with the surplus economy’s currency will change the relative price of tradable goods, and facilitate a return to balance or (more likely) an over-shooting into surplus the other direction.

More complexly, an economy may be unable to export enough goods to pay for its imports, but is able to find funds elsewhere. Service exports, for example, are more than sufficient to pay for Hong Kong’s domestic goods export shortfall. In poorer countries, foreign aid may fill the gap while in rapidly developing economies a capital account surplus often off-sets a current-account deficit. Finally, there are some economies where transfers from nationals working abroad contribute significantly to paying for imports. The Philippines, Bangladesh and Mexico are examples of transfer-rich economies.

Milton Friedman on trade deficits

In the 1980s, Milton Friedman, the Nobel Prize-winning economist and father of Monetarism, contended that some of the concerns of trade deficits are unfair criticisms in an attempt to push macroeconomic policies favorable to exporting industries.

Prof. Friedman argued that trade deficits are not necessarily important as high exports raise the value of the currency, reducing aforementioned exports, and vise versa for imports, thus naturally removing trade deficits not due to investment. Milton Friedman's son, David D. Friedman, shares this view and cites the comparative advantage concepts of David Ricardo.^[18]

In the late 1970s and early 1980s, the U.S. had experienced high inflation and Friedman's policy positions tended to defend the stronger dollar at that time. He stated his belief that these trade deficits were not necessarily harmful to the economy at the time since the currency comes back to the country (country A sells to country B, country B sells to country C who buys from country A, but the trade deficit only includes A and B). However, it may be in one form or another including the possible tradeoff of foreign control of assets. In his view, the "worst case scenario" of the currency never returning to the country of origin was actually the best possible outcome: the country actually purchased its goods by exchanging them for pieces of cheaply-made paper. As Friedman put it, this would be the same result as if the exporting country burned the dollars it earned, never returning it to market circulation.^[19] This position is a more refined version of the theorem first discovered by David Hume.^[20] Hume argued that England could not permanently gain from exports, because hoarding gold (i.e., currency) would make gold more plentiful in England; therefore, the prices of English goods would rise, making them less attractive exports and making foreign goods more attractive imports. In this way, countries' trade balances would balance out.^[21]

Friedman believed that deficits would be corrected by free markets as floating currency rates rise or fall with time to encourage or discourage imports in favor of the exports, reversing again in favor of imports as the currency gains strength. In the real world, a potential difficulty is that currency markets are far from a free market, with government and central banks being major players, and this is unlikely to change within the foreseeable future. Nevertheless, recent developments have shown that the global economy is undergoing a fundamental shift. For many years the U.S. has bore world has lent and sold. However, as Friedman predicted, this paradigm appears to be changing.

As of October 2007, the U.S. dollar weakened against the euro, British pound, and many other currencies. For instance, the euro hit $1.42 in October 2007^[22], the strongest it has been since its birth in 1999. Against this backdrop, American exporters are finding quite favorable overseas markets for their products and U.S. consumers are responding to their general housing slowdown by slowing their spending. Furthermore, China, the Middle East, central Europe and Africa are absorbing more of the world's imports which in the end may result in a world economy that is more evenly balanced. All of this could well add up to a major readjustment of the U.S. trade deficit, which as a percentage of GDP, began in 1991.^[23]

Friedman and other economists have pointed out that a large trade deficit (importation of goods) signals that the country's currency is strong and desirable. To Friedman, a trade deficit simply meant that consumers had opportunity to purchase and enjoy more goods at lower prices; conversely, a trade surplus implied that a country was exporting goods its own citizens did not get to consume or enjoy, while paying high prices for the goods they actually received.

Friedman contended that the structure of the balance of payments was misleading. In an interview with Charlie Rose, he stated that "on the books" the US is a net borrower of funds, using those funds to pay for goods and services. He essentially claimed that the foreign assets were not carried on the books at their higher, truer value.

Friedman presented his analysis of the balance of trade in Free to Choose, widely considered his most significant popular work.

Warren Buffett on trade deficits

The successful American businessman and investor Warren Buffett was quoted in the Associated Press (January 20, 2006) as saying "The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil... Right now, the rest of the world owns $3 trillion more of us than we own of them."

John Maynard Keynes on the balance of trade

In the last few years of his life, John Maynard Keynes was much preoccupied with the question of balance in international trade. He was the leader of the British delegation to the United Nations Monetary and Financial Conference in 1944 that established the Bretton Woods system of international currency management.

He was the principal author of a proposal—the so-called Keynes Plan—for an International Clearing Union. The two governing principles of the plan were that the problem of settling outstanding balances should be solved by 'creating' additional 'international money', and that debtor and creditor should be treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected, in part because "American opinion was naturally reluctant to accept the principal of equality of treatment so novel in debtor-creditor relationships". ^[24]

His view, supported by many economists and commentators at the time, was that creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious consequences. In the words of Geoffrey Crowther, then editor of The Economist, "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos." ^[25]

These ideas were informed by events prior to the Great Depression when—in the opinion of Keynes and others—international lending, primarily by the United States, exceeded the capacity of sound investment and so got diverted into non-productive and speculative uses, which in turn invited default and a sudden stop to the process of lending. ^[26]

Influenced by Keynes, economics texts in the immediate post-war period put a significant emphasis on balance in trade. For example, the second edition of the popular introductory textbook, An Outline of Money, ^[27] devoted the last three of its ten chapters to questions of foreign exchange management and in particular the 'problem of balance'. However, in more recent years, since the end of the Bretton Woods system in 1971, with the increasing influence of Monetarist schools of thought in the 1980s, and particularly in the face of large sustained trade imbalances, these concerns—and particularly concerns about the destabilising affects of large trade surpluses—have largely disappeared from mainstream economics discourse ^[28] and Keynes' insights have slipped from view ^[29], they are receiving some attention again in the wake of the financial crisis of 2007–2009. ^[30]

Physical balance of trade

Monetary balance of trade is different from physical balance of trade (which is expressed in amount of raw materials). Developed countries usually import a lot of primary raw materials from developing countries at low prices. Often, these materials are then converted into finished products, and a significant amount of value is added. Although for instance the EU (as well as many other developed countries) has a balanced monetary balance of trade, its physical trade balance (especially with developing countries) is negative, meaning that a lot less material is exported than imported.

United States trade deficit

United States trade deficit (1991-2005).

The United States of America has held a trade deficit starting late in the 1960s. It was this very deficit that forced the United States in 1971 off the gold standard. Its trade deficit has been increasing at a large rate since 1997 ^[31] (See chart) and increased by 49.8 billion dollars between 2005 and 2006, setting a record high of 817.3 billion dollars, up from 767.5 billion dollars the previous year.^[32]

It is worth noting on the graph that the deficit slackened during recessions and grew during periods of expansion. Also of note, many economists calculate trade deficits and/or current account deficits as a percentage of GDP. The US last had a trade surplus in 1991, a recession year. Every year there has been a major reduction in economic growth, it is followed by a reduction in the US trade deficit.^[23] The investor Warren Buffett has proposed a tool called Import Certificates as a solution to the United States' problem.^[33]

See also

• List of the largest trading partners of the United States
• Current account
• Balance of payments
• FRED (Federal Reserve Economic Data)
• List of countries by current account balance

Notes

1. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 462. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4. 
2. ^ ^{a b c d} Bivens, L. Josh (December 14, 2004). Debt and the dollar Economic Policy Institute. Retrieved on July 8, 2007.
3. ^ MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES. U.S. Treasury.gov
4. ^ Roberts, Paul Craig (August 7, 2003). Jobless in the USA Newsmax. Retrieved on May 6, 2007.
5. ^ ^{a b} Hira, Ron and Anil Hira with forward by Lou Dobbs, (May 2005). Outsourcing America: What's Behind Our National Crisis and How We Can Reclaim American Jobs. (AMACOM) American Management Association. Citing Paul Craig Roberts, Paul Samuelson, and Lou Dobbs, pp. 36-38.
6. ^ See Roberts, Loc. cit.
7. ^ Paul Craig Roberts (07/28/04)."Global Labor Arbitrage".VDARE. Retrieved on July 7, 2009.
8. ^ Whitney, Mike (June 2006).Labor arbitrage. Entrepreneur. Retrieved on July 7, 2009.
9. ^ The shift away form thrift.The Economist, April 7 2005.
10. ^ Free Trade Bulletin no. 27: Are Trade Deficits a Drag on U.S. Economic Growth? | Cato's Center for Trade Policy Studies
11. ^ Causes and Consequences of the Trade Deficit: An Overview
12. ^ David Friedman, New America Foundation (2002-06-15).No Light at the End of the Tunnel Los Angeles Times.
13. ^ Sir Keith Joseph, Centre for Policy Studies (1976-04-05).Stockton Lecture, Monetarism Is Not Enough, with forward by Margaret Thatcher. (Barry Rose Pub.) Margaret Thatcher Foundation (2006).
14. ^ ^{a b} Phillips, Kevin (2007). Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. Penguin. ISBN 9780143143284. 
15. ^ ^{a b} Cauchon, Dennis and John Waggoner (October 3, 2004).The Looming National Benefit Crisis USA Today
16. ^ George W. Bush (2006) State of the Union. Retrieved on April 17, 2009.
17. ^ Bailey, David and Soyoung Kim (June 26, 2009).GE's Immelt says U.S. economy needs industrial renewal.UK Guardian.. Retrieved on June 28, 2009.
18. ^ Price Theory, Chapter 6: Simple Trade
19. ^ Free to Choose video series from PBS
20. ^ Hume, David (1987). "Essays, Moral, Political, and Literary". Liberty Fund, Inc. http://www.econlib.org/library/LFBooks/Hume/hmMPL28.html. 
21. ^ ""David Hume: The Concise Encyclopedia of Economics"". 2008. http://www.econlib.org/library/Enc/bios/Hume.html. Retrieved 2009-03-20. 
22. ^ Dollar Hits a New Low, Oil Hits a New High - New York Times
23. ^ ^{a b} Michael M. Phillips, World Economy in Flux As America Downshifts
24. ^ Crowther, Geoffrey (1948). An Outline of Money. Thomas Nelson and Sons. p. 326-9. 
25. ^ Crowther, Geoffrey (1948). An Outline of Money. Thomas Nelson and Sons. p. 336. 
26. ^ Crowther, Geoffrey (1948). An Outline of Money. Thomas Nelson and Sons. p. 368-72. 
27. ^ Crowther, Geoffrey (1948). An Outline of Money. Thomas Nelson and Sons. 
28. ^ See for example, Krugman, P and Wells, R (2006). "Economics", Worth Publishers
29. ^ although see Duncan, R (2005). "The Dollar Crisis: Causes, Consequences, Cures", Wiley
30. ^ See for example, ""Clearing Up This Mess"". 2008-11-18. http://www.monbiot.com/archives/2008/11/18/clearing-up-this-mess/. Retrieved 2009-01-09. 
31. ^ http://www.census.gov/foreign-trade/statistics/historical/gands.txt
32. ^ FTD - Statistics - Country Data - U.S. Trade Balance with World (Seasonally Adjusted)
33. ^ http://www.berkshirehathaway.com/letters/growing.pdf

External links

Wikisource has the text of the 1911 Encyclopædia Britannica article Balance of Trade.

• Are Trade Deficits a Drag on U.S. Economic Growth?
• Graph of Historical U.S. Net Export of Goods and Services
• Where Do U.S. Dollars Go When the United States Runs a Trade Deficit? from Dollars & Sense magazine
• The Economic Impact of a U.S. Slowdown on the Americas from the Center for Economic and Policy Research
• OECD Trade balance statistics
• U.S. Government Export Assistance

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