South-Western College Publishing - Economics  
World Economy View of the Trade Deficit
Subject Trade Deficit
Topic International Trade
Key Words

Imports, Exports, and Trade Deficit

News Story

The U.S. dollar, which had been falling earlier in the week as the U.S reported weaker-than-expected employment gains, rallied somewhat by remarks of Fed Chairman Alan Greenspan. Greenspan was speaking to a gathering of the Group of 7 leading industrialized nations in London, England. This early 2005 meeting will likely devote quite a bit of attention to the United States budget and trade deficits.

Mr. Greenspan remarked that foreign exporters selling goods in the U.S. are not likely to continue their willingness to keep prices down and accept smaller profits. He suggested that they might be willing to give up American market share in face of a continuing fall of the dollar's value.

"We may be approaching a point, if we are not already there, at which exporters to the United States, should the dollar decline further, would no longer choose to absorb a further reduction in profit margins," he said. This means that the volume of U.S.imports will fall, "leaving the resulting value of imports uncertain."

Mr. Greenspan said exporters of American products find their profit margins bolstered by the weak dollar, which makes American goods more attractively priced to foreign buyers. Greenspan says these profit margins "appear to be increasing, which bodes well for future U.S. exports and the adjustment process."

"Besides market pressures, which appear poised to stabilize, and over the long run, possibly to decrease the U.S. current account deficit and its attendant financing requirements, some forces in the domestic U.S. economy seem about to head in the same direction," Mr. Greenspan said.

Referring to promises of the Bush administration to cut back on spending, Greenspan stated, "The voice of fiscal restraint, barely audible a year ago, has at least partially regained volume." As the government spends less, it requires less borrowing to pay for its spending. This will take some of the pressure off of what Greenspan refers to as "attendant financing requirements" of the trade deficit and gives the U.S. economy more flexibility in its financing options.

Mr. Greenspan is one among many who have said that the United States cannot sustain its trade deficit at its current level. Estimates now put the deficit at close to 6 percent of the nation's gross domestic product. "I have argued elsewhere that the U.S. current account deficit cannot widen forever but that, fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity," he said. Adding a touch of ambiguity to his remarks, Greenspan said, "That argument will be tested, I suspect, by possibly new twists and turns that will emerge in a seemingly ever-more complex international economic and financial structure".

Questions
1.

Discuss how less borrowing to finance a budget deficit relates to financing a trade deficit.

2. Using any source available, find and list the Group of 7 leading industrialized nations. When was this "Group of 7" formed? Would you add any major industrialized nations to this groups today?
3. Define a trade deficit and compare it to a budget deficit.
Source Alan Cowell, "Greenspan Sees U.S. Trade Gap Stabilizing and Possibly Falling" The New York Times Online, February 4, 2005.

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