Trade Deficit and Current Account Deficit: Examining the Impact on the US Dollar

Trade Deficit and Current Account Deficit [Name of the Writer] [Name of the Institution] Trade Deficit and Current Account Deficit Critically examine this statement, “Current Account Deficits do not seem to matter anymore – the US$ appears to remain unaffected by escalating US trade deficits”, by reference to the “Balance of Payments Approach” to exchange rate determination The trade deficit of the US is at exorbitantly high levels. Many economists suggest that depreciating the US dollar would help put a squeeze on United States enthusiasm for globally produced goods.

Since this move of depreciation would inherently curb the exaggerated import costs that the US so loves to incur. Furthermore, these three critical factors essentially would help limit the import prices incurred by US due to the trend of rising demands that has permeated in the societal culture: * The practice of using USD for US trade invoicing; * Exporters concerns on market share dynamics, and; * The outrageous US distribution costs. $759 billion is the aggregated US trade deficit in 2006. This is six percent of the actual nominal GDP of the country.

One of the biggest contributory factors is the impasse of plethora of imported goods from foreign lands. In the perspective of numerous investigators and policymakers, dollar depreciation remains a crux system for tending to this export-import imbalance and restoring the worldwide competitiveness of American producers. Indeed in principle, a weaker dollar might as well raise the expense of different merchandise for U. S. consumers, in this manner diminishing U. S. mandate for imports in the meantime that it helps gather interest by foreign nations for U. S. products by making the country's exports increasingly cost-focused abroad.

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My investigation uncovers that dollar depreciation is unrealistic to shut the exchange crevice courageously. To make sure, remote request for U. S. exports may as well develop, as speculation predicts. Since basically all U. S. exports to different nations are invoiced in dollars, remote buyers will determine an instantaneous profit from dollar depreciation as the expense of their buys decreases in varying foreign currencies. Notwithstanding, the value of outside imports for U. S. consumers will be impressively increasingly versatile to conversion standard updates.

Exchange invoicing practices, it is contended, donate altogether to the lack of care of import costs to trade rates. Since very nearly the sum of the products that the United States imports, for instance those it exports, are invoiced in dollars, the costs of foreign made merchandise remain settled for a period when trade rates change. Also, even in the longer term—over, state, the year emulating dollar depreciation—the craving of outside makers to remain focused in the huge U. S. business sector might lead them to oppose expanding the dollar value of their products.

Beyond any doubt, the atypically towering showcasing and appropriation takes added to imports once they drop in the United States—fetches designated in dollars—further isolate the last utilization value of foreign made merchandise from conversion scale updates. The American President stated that: “The best way to, deal with the trade deficit is to make sure that America is the best place in the world to do business... ” Examine this view that promoting growth is more effective than direct targeting of the trade deficit USA is a diverse country with numerous of its regions continuously producing high growth, innovative companies.

These companies have risen above the economic downturn that hit the global economy in the start of the 21st century. Rather with surprise, the diverse US states boast such companies not only distributed in the locales of Silicon Valley and Boston but rather in most of its states. End of 2012; saw a sharp decline in the trade deficit of the US. In this period, oil imports drastically reduced whereas exports increase sharply. This essentially iterates that the shrinking trade gap, has improved on the government’s estimated growth and trade deficit levels.

Furthermore, the levels reached in the closing months of 2012 indicate towards levels that have not been observed in the last three years. This is a positive inducement. Exportation of US products saw rise in oil exports and other petroleum based-product exports. Further, aircraft sales and agricultural good sales also demonstrated positive increment. Various economists believe that this is a very encouraging sign. Though, economists have stated that the essential focus of the US treasury should be to enhance growth in the country, and secondary considerations should be given to the trade deficit.

This assertion is based on the belief that reinvigorating the business systems of the country would deplete the rising gap between the socio economic classes of the country. Furthermore, individual families would be given financial stability and long term sustainability. It also has to state that the narrowed gap between imports and exports, i. e. the trade deficit, essentially iterate that US corporations earn extra then their foreign counterparts. Furthermore, domestic consumption of foreign goods is also less in comparison.

It is expected that the companies are not piling up their inventories; this indirectly suggests that curbing expenses including cuts in defence spending would help in keeping a positively skewed growth rate in the future months. These events would see an additional negative pressure on the trade deficit that has started to show signs of decrease. As such economists are of the view that trade will be favourably impacted in 2013. These forecasts are dependent on premises that iterate that the EU debt crisis will finally show some features of stabilizing.

This would further give a positive boost to the US exports. Moreover, economic growth witnessed in Asia would also positively impact the growth potential of the US. One of the biggest negatives for US is the rising trade deficit between China and the US. This trade deficit climbed to a spectacular 300 billion mark in 2012. This would be the biggest pressure point on the growth prospects of the US economy. Economists have confronted this issue by attacking the economic policies of China, specifically the country’s practices to artificially peg their currency at far lower levels, than is required.

This assertion is made with the logic that such an economic move by China would essentially lower the costs of its exports in the US. UK trade statistics show similar trends to the US situation. Review the suggestion of b) above for the UK situation UK trade statistics show similar trends of that of US i. e. ever-increasing trade deficits and curbing growth prospects. Given these circumstances and the global economic turmoil that hit the global economies in the early years of the millennia, it is disappointing to even follow the growth prospects of the World, let alone the UK.

Britain’s trade deficit also demonstrates a serious picture of disappointment. Economic chiefs of the country suggest that the super competitive currency i. e. the British Pound Sterling can be the glimmer of hope in this dismal economic prospect. This is because the currency is almost a quarter below the pre financial crisis levels. In 2008, December reports indicated that the nation’s deficit consumed after trade sharply rose to 14 billion pounds. One of the biggest factors of this deficit jump is attributed to magnified increase in aircraft import costs.

Given these factors, it juxtaposes a truly saddening prospect for the country. Economists who eagerly made plans to rebalance the economic prospects of the economy, by cashing on the decline in pounds value to feed increases through export based growth. BoE has thus decided to restrict any particular changes to the interest rates. This was due to suggestions that raising the rates would cause pound to appreciate, thus thwarting the trade prospects, negatively. Nonetheless, declining GBP has not appeased the concerns of above targeted and persistent economic inflation, as well as higher than necessary import prices.

Current UK growth prospects and outlook suggests that the region would see improvements, although the road to recovery would be filled with bumps and slowness. Outlook prospects also indicate that consumer spending would be positively impacted. Furthermore, squeezes on real incomes would also subside, slowly. These are thoughts that do not cross the normal household. As such they remain scared, and cautious towards excessive spending. This is keeping a tap on growth. UK economy does not have the support of infrastructure of commerce that is established in the US.

As such the economy is overfilled, without vacuum, and without much chances of astronomical growth. Additionally, close associations with a debt ridden EU has also kept pressures on growth. Though, it is accepted that growth in the nation is the biggest policy to be looked for, economic wise. Moreover, trade deficit should be given a secondary consideration. References Smith, David (2011) Trade Deficit Sunday Times The Balance of Payments and Macroeconomic Policy in an Open Economy Book Chapter

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