South-Western College Publishing - Economics  
U.S. Sets New Trade Gap Record
Topic International Trade
Key Words International Trade, Exports, and Imports
Full Article

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Reference ID: A153271487

News Story Same old story. With Chinese imports leading the way, the American trade deficit in August was wider than it has ever been. The trade deficit figure measures the difference between what Americans buy from foreign producers and what we are able to sell to foreign countries. Nearly a third of the deficit, $22 billion, comprises entirely the trade imbalance between the United States and China.

The new numbers defied previous expectations. Economists surveyed before the report came out predicted the trade deficit would fall in August as energy prices fell precipitously. Thus, the actual result of a $1.9 billion increase above the July figure shocked the markets. July's trade deficit also set a record, which many analysts assumed would be a peak with a decrease in store for August. The kicker: Energy prices remained artificially high during the summer despite expected price decreases, so the gap continued to widen.

Now, just as was predicted in July, many economists believe that trade deficit growth is near an end. "This is probably as bad as it gets," said Paul Ashworth, senior United States economist with Capital Economics, an economic research firm in London. Counting on lower oil prices, other economist expect the gap to moderate sometime in the near future. "The trade balance should improve significantly soon," said ING economist Dimitry Fleming. "August, however, was never going to be the starting point with the lagged effects of higher oil prices."

While American spending on foreign goods shows no signs of weakening, exports also remain strong. Exports declined in July, but grew in August by 2.3 percent to $122.4 billion--obviously not enough to offset the rise in imports, which reached $192.3 billion. The disparity in these numbers created the trade deficit of $69.9 billion.

Discussion Questions:
1. Define a trade deficit. Contrast the trade deficit with the U.S. budget deficit. Which, in your mind, is more important or potentially damaging to the U.S.?
2. The article suggested that imports from China are a large part of the deficit. Use any source available to determining the trade deficit between the U.S. and China during August of 2006.
Multiple Choice/True False Questions:
1. A trade deficit occurs when exports exceed imports.
  1. True
  2. False
2. According to the article, economists expect an increase in energy prices to moderate the trade deficit.
  1. True
  2. False
Source James Kanter, "China Trade Policies Draw a Warning From Europe", The New York Times Online, October 25, 2006.
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