South-Western College Publishing - Economics  
Good News and Bad
Subject Trade Deficit
Topic International Trade
Key Words

Imports, Exports, and Foreign Trade

News Story

The Commerce Department reported a record trade deficit of $46 billion for March, 2004. Even though American exports grew over the past 12 months due to the decline in the value of the dollar and a stronger demand from abroad, the difference between exports and imports continued to widen as American's increased their demand for foreign goods and services.

"We thought the deficit had topped out, because the dollar has weakened quite a bit over the past couple of years and there is more growth overseas," said David Hensley, an international economist at J.P. Morgan. Over the past two years, the dollar actually has depreciated by 16 percent and has helped dampen the trade deficit. However, an index compiled and maintained by J.P. Morgan shows that, since early April, the dollar has appreciated by about 5 percent. As the dollar appreciates, American goods and services become more expensive to foreign buyers. Exports fall off and the trade deficit widens.

"The rise in the dollar over the last few months has been too recent to affect the trade figures very much," according to Mr. Hensley. "But if the deficit was starting to go up again at the end of the first quarter, and you are seeing a strengthening dollar, that suggests things could get worse."

Edwin M. Truman, a senior fellow at the Institute of International Economics in Washington, said the report highlighted "tension between the good news of rapid U.S. economic expansion, and the bad news that the expansion is adding to the size of the trade and current account deficits that we have to finance."

(Updated July, 2004)

Questions
1.

How does a strengthening dollar increase the trade deficit?

2. Why is the improving economy increasing the trade deficit?
3. What does the statement, "the dollar has appreciated by about 5 percent" mean? What questions would you like to ask about how this appreciation is calculated?
Source Kenneth N. Gilpin, "Economic Growth Swells Trade Deficit to Record $46 Billion", New York Times Online, May 12, 2004.

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