Question

Explain what is meant the term ‘trade deficit’ and how it is ‘automatically’ corrected through economic forces.

Answer 1

A trade deficit is an sum by which the cost of imports from a country is greater than the cost of its exports. This is one way to calculate foreign trade, which is often considered a negative trade balance. A trade deficit can be determined by subtracting a country's total export value from the total value of its imports.

There is also a trade imbalance while companies produce in other countries. Raw materials delivered overseas to factories count as exports for manufacturing. Once exported back to the nation the finished imported goods are counted as imports. Imports are subtracted from the gross domestic product of the country and the earnings that support the stock price of the business and the taxes that increase the revenue stream of the country.

The deficit can be rebalanced automatically but there is no guarantee that the reversal will be smooth.
As demonstrated by the simulation studies above, there are threats to the US economy and other economies for an sudden reversal of the deficits associated with a recession. Therefore, leading the rebalancing cycle along a smooth road is a challenge for policy makers worldwide. You may draw certain policy conclusions, as follows.

First, there is no good solution in the short run for rebalancing the large U.S. deficits. Macroeconomic policies will in turn aim to avoid any sudden change. Currently the sharp downturn in U.S. domestic demand, especially in spending on business capital, should be stabilized as soon as possible. In this way, monetary easing can be more effective than fiscal policy, as it requires a long period of political decision-making

Second, a beneficial smooth medium- to long-term rebalancing of the U.S. trade deficit would entail both a gradual narrowing of the U.S. private sector savings-investment gap and a increase in other countries 'economic development. Policies in the United States, such as monetary policy, should strive to promote higher savings rates for households, and should avoid reducing investment. In other economies, policies would strive to encourage productivity growth and thus increase revenue growth