South-Western College Publishing - Economics  
Paradoxically, Some Economists Believe that Higher Oil Prices May Narrow the U.S. Trade Deficit
Topic International Trade
Key Words Imports, Exports, Trade Deficit
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Reference ID: A146854019

News Story Americans continue to buy foreign cars, sporting goods, toys, and electronics from overseas. The result: a U.S. trade deficit that grew slightly wider in April. The trade deficit is the amount that a country's imports of goods and services exceeds its exports of goods and services. As that gap widens, it indicates that Americans are buying more from abroad than they are selling abroad.

kly and continuously rising oil prices strongly influence the rising imbalance between imports and exports, which increased the trade gap to $63.43 billion in April, up 2.4 percent over March. The April numbers indicated the first deficit increase since January. Americans imported more cars, household goods and clothes, while exporting fewer expensive items. On the consumer side, pharmaceutical exports fell. On the commercial side, airplane exports dropped.

Economists are usually quick to point out that multibillion-dollar trade deficits are not sustainable--but this time, the economists stood silenced. Their minimal show of concern over the deficit indicates that they expect the trade deficit will actually bottom out or even contract in the near future as consumers spend less and the economy slows. Although the gap has widened, it did not increase as much as predicted, so the slowdown may already be taking place. Combine this lower-than expected deficit with signs that consumers may soon spend less on non-oil exports because of higher energy prices and some believe that trade deficit numbers could improve.

"I think in May and June we're going to see very tepid imports of consumer products," said Global Insight economist Brian A. Bethune, "They're pulling in their horns and shying away from the big-ticket items."

As usual, economists disagree whether the imbalance will get worse before it gets better and whether the U.S. economy will slow down enough to curb the American appetite for imported goods. However, if growth in foreign counties, especially Asia, continues, Americans will export more-thus the trade imbalance could improve. "The U.S. will continue to have a deficit, it just will not be as large," said Tanweer Akram, a senior economist at Moody's

Discussion Questions:
1. Define a trade deficit. Can you identify any benefits or costs?
2. How does the article explain how higher prices for imported oil can serve to reduce the trade deficit. Do you buy Bethune's argument?
Multiple Choice/True False Questions:
1. According to the article, a significant increase in the price of imported oil could:
  1. have no impact on the trade deficit.
  2. reduce the trade deficit.
  3. increase the trade deficit.
  4. increase imports.
2. A trade deficit occurs when a country:
  1. buys more goods from other countries' producers than from its own.
  2. sells more goods to other countries than it buys from them.
  3. buys more goods from other countries than it sells to them.
  4. buys fewer goods from other countries' producers than from its own.
Source Jeremy W. Peters, "U.S. Trade Deficit Widens, but Economist See Relief", The New York Times Online, June 10, 2006.
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