Trade Balance Basics
These are goods and services produced within one country and sold to buyers in other countries.
What are exports?
This accounting statement records all economic transactions between the residents of one country and residents of the rest of the world.
What is the balance of payments?
This occurs when foreign investors purchase domestic assets such as stocks, bonds, businesses, or real estate.
What is a financial capital inflow?
This refers to income that households, businesses, or governments do not spend on current consumption.
What is saving?
This occurs when a country imports more goods and services than it exports.
What is a trade deficit?
This country has frequently run large trade deficits while attracting substantial financial investment from abroad.
What is the United States?
These are goods and services produced in other countries and purchased by domestic households, businesses, or governments.
What are imports?
This part of the balance of payments records international transactions involving goods, services, income, and unilateral transfers.
What is the current account?
This occurs when domestic investors purchase assets located in other countries.
What is a financial capital outflow?
This refers to spending on new factories, equipment, technology, and other forms of productive capital.
What is investment?
This occurs when a country exports more goods and services than it imports.
What is a trade surplus?
This European country is well known for exporting more goods and services than it imports.
What is Germany?
This occurs when the dollar value of a country’s exports exceeds the dollar value of its imports.
What is a trade surplus?
This part of the balance of payments records international purchases and sales of financial assets, such as stocks, bonds, businesses, and real estate.
What is the financial account?
When a country imports more goods and services than it exports, it generally needs this type of financial flow to help pay for the difference.
What is a net financial capital inflow?
This identity shows that the supply of financial capital must equal the demand for financial capital.
What is the national saving and investment identity?
A trade deficit may support future economic growth when the borrowed funds are used for this purpose.
What is productive investment?
During a recession, a country’s trade deficit may shrink because households and businesses reduce spending on these.
What are imports?
A country exports $450 billion worth of goods and services and imports $525 billion worth. This is the amount and type of its trade balance.
What is a $75 billion trade deficit?
Calculation:
$450 billion−$525 billion=−$75 billion
When a U.S. company sells machinery to a business in Canada, the transaction is recorded as this type of entry in the U.S. current account.
What is a credit, or an inflow of funds from an export?
A Japanese company purchases a factory in the United States. From the U.S. perspective, this transaction represents this kind of international financial flow.
What is a financial capital inflow into the United States?
When domestic investment exceeds the sum of private saving and government saving, this source of funds must make up the difference.
What is foreign financial capital?
A trade deficit is more concerning when foreign borrowing is used mainly to finance this rather than new productive capacity.
What is current consumption?
Countries such as Mexico and several East Asian economies experienced this type of crisis after foreign investors rapidly withdrew financial capital.
What is an international financial crisis?
A nation’s exports increase by $40 billion while its imports increase by $65 billion. This is what happens to the nation’s trade balance.
What is the trade balance decreases, or moves $25 billion further toward a deficit?
Exports increased, but imports increased by an additional $25 billion. Therefore, net exports—and consequently the trade balance—declined by $25 billion.
If a country has a current account deficit, the balance-of-payments accounting framework indicates that it must generally have this in its financial account.
What is a financial account surplus, or a net financial capital inflow?
Explanation:
A current account deficit means the country is spending more abroad than it receives through current-account transactions. The difference is financed by foreign investment flowing into the country.
This phrase describes the relationship between a nation’s trade balance and its international financial capital flows.
What are two sides of the same coin?
Suppose domestic investment remains unchanged while a larger government budget deficit reduces national saving. According to the national saving and investment identity, this is the likely effect on the trade balance.
What is a movement toward a larger trade deficit, or a smaller trade surplus?
Explanation:
With less national saving available to finance domestic investment, the country must rely more heavily on foreign financial capital. That increased capital inflow is associated with a larger trade deficit.
This is the best economic conclusion when asked whether a trade deficit or trade surplus is always good or always bad.
What is it depends on the causes and circumstances?
Explanation:
A trade deficit can help finance productive investment, but it can also reflect excessive borrowing or consumption. Likewise, a trade surplus can reflect economic strength, but it may also result from weak domestic demand or limited investment opportunities.
A country that runs a persistent trade surplus is generally sending more financial capital abroad than it receives. This makes the country this type of international investor.
What is a net lender to the rest of the world?
Explanation:
A trade surplus means a country receives more from exports than it spends on imports. The excess funds are invested abroad, creating a net financial capital outflow.