1. The trade deficit problems
The balance of trade is the difference between the monetary value of all the exports and imports in an economy over a certain period of time. In fact a favorable balance of trade is the one in which consists of exporting more than is imported. While an unfavorable balance of trade or trade deficit involves trade gaps due to imbalances of trade. Trade is divided into goods and services.
A rising trade deficit which is at times regarded as a falling surplus is not a remarkable event for the U.S. economy. Any value of production is able to generate an equal value of income within the economy. The income earned can support spending that is sufficient to purchase the economies
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However, with International trade, it is possible for spending and production to be imbalanced through the borrowing and lending of income and other outputs among nations.
The trade deficits have increased steadily in the recent years with the United States growing rapidly relative to most major trading partners.
Several factors have led to the widening of the trade deficit between the U.S and other trading partners. They include; there is fewer trade barriers abroad for the U.S goods, the goods have a greater acceptance not because of foreign dumping of exports. This trade deficit is mainly supported by the macroeconomic spending and saving behavior of the American. The U.S economy, spend beyond current output, while the excesses of demand are met by a net inflow of foreign goods and services.
Trade deficit will not be possible if all foreign economies are able to produce more than there their current spending and are able and are able to export the surplus while at the same time importing other commodities with an equal economic value as their imports
2.Why is the trade deficit "out of control?"
Several factors have to serious trade imbalances making the situation out of control within different economies. Competitiveness among similar products in different states has been attributed to the presence of labor. High cost labor is a reflection of the deterioration of goods and services in that particular sector in relation to the same goods produced in an economy with sufficient labor.
High growth of an economy contributes to trade deficits because it causes a depreciation of the exchange rate which makes imports to be more expensive due to depreciation in exchange rate.
The way in which current accounts are financed determines the directions in which trade deficit are to take. If financing is through long term capital investment, the impacts to the economy are positive and very beneficial compared to short term financing which puts the a lot of strain on the already constrained economy. This results to over dependency on imported goods to the affected economy. The overdependence on the dollar as the main monetary unit of trade has affected a free trade because some investors have been hit by the falling dollar resulting to reduced imports and export due to the unattractive nature of the dollar.
The trade deficits can get out of control when the saving ratio is very low among people in a certain state. Low saving is an indicator that people are spending more at the expense of saving and investing for a better future. To support the high levels of spending the economy is supposed to import more than its exporting and this results into trade deficits making the situation out of control because a state can only export its surplus. A good example is china which has surplus due to its saving ratio while the U.S has a partly low saving ratio and a very high personal debt suggesting a totally unbalanced economy (Bivens 2006 ).
3: Predict the trade deficit in 2010
Within the year 2010 the U.S. trade deficit rose to the highest level due to an improving U.S. economy. The improved economy has pushed up demand for imports while exports rose boosted by a weaker dollar. The weakening of the dollar supports the growth of exports within the American manufacturers who are being helped by a rebounding global economy.
The exports from America have shown signs of continued rise due to the increased demand of American made commodities such as the autos, farm products and industrial machinery. On the other hand, Imports have as well being on the rise due to rise in petroleum imports and they are projected to maintain an upward trend within the year so as to sustain the high spending rate among the American population.
American manufactures are expected to continue facing unfair completion from china. Their main complaint is that China is unfairly manipulating its currency so as to gain trade advantages over the Americans (Bivens 2006 ).
Economic experts predict that the U.S economy has began showing signs of recovery from its worst downturn since the Great Depression, imports will keep rising. Development will continue in 2010 and a predicted higher trade is set to widen the trade deficit even further. The American manufacturers market overseas is expected to rise due to the continued fall in the dollar against most major currencies while interring the entry of goods into the American market.
In trade deficits are not necessary bad because of its usefulness as a vehicle to achieving an economic end.