South-Western College Publishing - Economics  
Trade Imbalance Widens Further
Topic International Trade
Key Words Imports, Exports, and the Trade Balance
News Story When a country runs a trade deficit it indicates that domestic consumers are buying more from abroad than they are selling abroad. In December alone, the U.S. trade deficit grew by 5.3 percent.

Economists worry about the trade deficit because a growing trade deficit acts as a drag on the domestic economy. Money spent abroad does not translate into more jobs and economic well- being for the domestic economy. National Income Accountants will, in light of the new trade figures, revise their estimate of the nation's fourth-quarter gross domestic product. The new figures are expected to show slightly slower expansion than the 3.5 percent previously predicted for October through December.

Once again, China was the main contributor to the imbalance. In December U.S. consumers bought $19 billion more from China than U.S. business sold to China. For the year 2006, Americans imported more from China than any other country, purchasing $287.8 billion worth of goods and services. On the other side of the ledger, Chinese consumers bought on $55.2 billion in goods and services from the U.S.

Although U.S. exports grew in 2006, imports grew more, resulting in the record trade deficit of $763.6 billion according to the Commerce Department. Much of the surge in the trade deficit for 2006 was caused by high oil prices and some economists thought oil prices would moderate in 2007.

"The jump was surprisingly large," said Peter E. Kretzmer, senior economist with Bank of America, "and will produce a further modest downward revision to last quarter's G.D.P growth, likely pushing annualized economic growth below 3 percent." Kretzmer's prediction comes after the government reported last month that the economy's rate of growth for all of 2006 was 3.4 percent.

Discussion Questions:
1. Discuss why a trade deficit can be a drag on the domestic economy.
2. Why would the fourth-quarter GDP figures have to be adjusted downward because of the Commerce Department's report of another record trade deficit?
Multiple Choice/True False Questions:
1. A trade deficit occurs when:
  1. government raises the interest rate.
  2. exports exceed imports.
  3. real GDP increases.
  4. imports exceed exports.
2. If oil prices decline in 2007, the trade deficit will:
  1. likely go away.
  2. likely moderate.
  3. likely get worse.
  4. likely stay about the same.
Source Jeremy Peters, "U.S. Trade Deficit Grew to Another Record in '06", The New York Times Online, February 14, 2007.
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