1. Is a current account deficit something to be avoided? Explain. A current account measures trade, international income, direct transfers of capital, and investment income. A current account deficit occurs when a country imports more goods, services, and capital than it exports. It creates a reliance on foreign parties for capital. A current account deficit isn’t necessarily something to be avoided – it can be a sign of economic growth, or a sign that the country is a credit risk. There are multiple components of a current account deficit that should be taken into account when assessing each case. The main component is trade deficit. A country experiences a trade deficit when it imports more goods and services than it exports. The next most …show more content…
Explain the short and long term effects resulting from a country’s currency depreciating. A currency depreciation will have both short and long term effects. In the short term, the exchange rate will cause a country’s exports to appear cheaper, thus also increasing the demand for those exports. Likewise, it will also make imports more expensive and reduce the demand. In the long term, the depreciation can lead to increased assumed demand, pushing economic growth. Higher assumed demand can also lead to higher real GDP and potentially inflation. All of this has the potential to impact the current account. The long term effects of currency depreciation depend on the demand for imports and exports, the conditions of the global economy (recession vs. boom), and inflation. If price demand is inelastic over time, the value of exports could fall. If demand becomes more price elastic over time, it could have a greater effect on the current account. The conditions of the global economy also play a large part. In a recession, depreciation may not sufficiently boost export demand. In a growing economy, demand will increase. In a boom, the effects of inflation will …show more content…
Policies related to international trade are closely tied to factors such as legal structures, government programs, human rights protection programs, cultural factors, and other social institutions – so closely tied that it is not possible to statistically differentiate between the open trade’s effect on growth and the economic growth’s effect on the related institutions. An economy entrenched in international trade may grow faster because it trades more, but it could also be the case that institutional and state policies are the stimulus of greater economic growth which also facilitate international
The dollar will be worth less and less if the nation is in high debt. People will also be affected, when you have less money you spend and buy less due to increased prices, which can cause problems in the economy such as a recession or worse a depression. Budget deficit calls for the government to let costs exceed national income and use monetary policy to jump start the economy. The government must be careful when choosing the best way to build the economy. If the policies fail, they can lead the nation into many problems, as stated above.
In conclusion, economic integration and economic globalization help reduce the probability of interstate belligerency because war negatively impacts the markets and investments, post World War reconstruction helps build stronger economies and lastly, countries would rather focus on specialization than war. In addition, economic integration and economic globalization help the economy grow and expand. These points show that war and conflict is decreasing because countries that are economically integrated prefer to free trade without any restrictions. As a result, markets increase since countries have more access to trade and that leads to an increase in globalization, whereas war would put the countries’ economies at risk.
Mexico was running an increasing current account deficit from US$7.5 billion in 1990 to US$23.4 billion in 1993. This indicates an excess of private investing over private savings. However, the country was able to maintain an improving fiscal account from US$3.6 billion deficit in 1990 to US$0.7 billion surplus in 1993. The deficit in current account was financed through capital funds from abroad resulting the capital account to increase from US$8.4 billion in 1990 to US$33.8 billion in 1993.
On the other hand, there are disadvantages to weakening dollar. The weak dollar is bad for American citizens. Weaken dollar lifted import price. Consumers face higher prices on foreign products or services.
Few governments will argue that the exchange of goods and services across international borders is a bad thing. However, the degree to which an international trading system is open may come into contest with a state’s ability to protect its interests. Free trade is often portrayed in a good light, with focus placed on the material benefits. Theoretically, free trade enables a distribution of resources across state lines. A country’s workforce may become more productive as it specializes in products that it has a comparative advantage. Free trade minimizes the chance that a market will have a surplus of one product and not enough of another. Arguably, comparative specialization leads to efficiency and growth.
While free trade has certainly changed with advances in technology and the ability to create external economies, the concept seems to be the most benign way for countries to trade with one another. Factoring in that imperfect competition and increasing returns challenge the concept of comparative advantage in modern international trade markets, the resulting introduction of government policies to regulate trade seems to result in increased tensions between countries as individual nations seek to gain advantages at the cost of others. While classical trade optimism may be somewhat naïve, the alternatives are risky and potentially harmful.
The foreign exchange market is a worldwide decentralized over-the-counter financial market for the trading of currencies. It determines the relative values of different currencies. A local currency is a currency not backed by a national government, and intended to trade only in a small area. Currency is used as a medium of exchange in goods and services. It has vital role in the economy. Because devaluation of a local currency makes its goods relatively cheaper; it increases the capacity of exports. With the decrease in demand for local country’s goods and services, its local currency devaluates and reverse is the case if its volume of exports increases.
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
Firstly, what should be noted here is that international trade has been providing different benefits for firms as they may expand in different new markets and raise productivity by adopting different approaches. Given that nowadays marketplace is more dynamic and characterized by an interdependent economy, the volume of international trade has grown substantially in recent years, reducing the barriers to international trade. However, after experiencing the economic crisis that took its toll in 2008 many countries adopted a different approach in terms of trade barriers by introducing higher tariffs in order to protect domestic firms from foreign competition (Hill). Secondly, in order to better understand the implications of the political arguments for trade it is essential to highlight the main instruments of trade policy (See appendix 1).
Trade is more than the exchange of goods and services; it sows the seeds for growth, development and provides the knowledge and experience that makes development possible (Cho, 1995). Trade is considered one of the main driving forces behind economic growth and poverty reduction, especially in Africa (Fosu and Mold, 2008). Adam Smith’s 1776 theory of absolute advantage states that a trading nation can gain by specialising in the production of the commodity of its absolute advantage and exchanging part of this output with other trading partners for the commodities of its absolute disadvantage (Llorah, 2008). This process enables countries to extend beyond their borders, allowing greater specialisation in production, enhanced effectiveness in use of thin resources, the growth of national income, the capacity to accumulate independent wealth and enhances the growth of the economy (Cho, 1995). According to DFID’s report, Trade Matters, other positive derivatives include raised employment, increased household income and the chance for people to earn their way out of poverty, independent of aid (DFID, 2005). The role of trade, while strongly advocated, is still highly debated (Collins and Graham, 2004; Madeley, 2000) and many recent studies question the positive role of economic growth on open trade (Bene, 2009). The extensive arguments surrounding this controversial discussion empirically highlight the difficulty in isolating the effect of trade liberalisation on economic growth, although it is clear that it does, and will continue to have, an important role in poverty alleviation.
As per Investopedia, “current account deficit is the measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports”. This means that current account deficit occurs when there is more outflow of money in comparison to its inflow in the country. Bhutan being a small Himalayan nation faces negative balance of trade over the year and according to the Statistical Yearbook of Bhutan 2015 (p.182), the trade deficit of Bhutan amounted to Nu. 31,614.16 million.
Tussie, D., & Aggio, C. (n.d.). Economic and social impacts of trade liberalization. Retrieved from http://www.unctad.info/upload/TAB/docs/TechCooperation/fullreport-version14nov-p106-119.pdf
In 1996, the US current account and emerging market plus developing country current account were each about zero. In 2008, US current account was in deficit by $ 600 bn, the emerging market/developing country current account in surplus by $ 900 bn. (sect. 1.1)
The U.S. dollar is used in most international transactions, and so what happens to the U.S.A. economy will be affected by the international financial resources.