Question

1.         Some view a high U.S. trade deficit as a sign that a country is less globally competitive. In “The Choice”, it says that this can be viewed as a positive sign regarding some aspect of the U.S. economy. Explain.

Answer 1

The trade deficit is the differences between the goods and services purchased by other countries and the goods and services we purchased. Some believe that our current large trade deficit is contributing to the recent decline in the value of the dollar, contributing to inflation and is in effect mortgaging our country's infrastructure to other countries. Some economists say that it is not a big problem because it will all balance out in the end. The following is a summary of the reasoning of the two positions.

First view:Negative (Less globally competitive)

• Some economists believe that our GDP and employment can be hurt by large deficits.
• In the real world, currencies are not as free to float in value as some economists' claim, Instead they are often manipulated by some governments (In our current situation, China.) to their benefit.
• Trade deficits lead to a lowering in the value of the dollar compared to other currencies. This raises the costs of imported goods and causes inflation.
• It leads to more foreign ownership of our assets and companies.
• In the short term, a trade deficit is not bad but sustained deficits will hurt future generations.

Second View: Positive

• According to Nobel Prize-winning economist, Milton Friedman, trade deficits are not harmful because the currency will always comes back to the country in some form or another.
• Trade deficits will be naturally be resolved either by currency devaluations, increased foreign ownership of assets or other forms of foreign investment.
• A trade deficit is an indication that the currency is desired.
• The current method of calculating the trade deficit does not fully account for income derived from foreign sources or for US ownership of foreign stocks.

Main Reference: wikipedia