Question

The US trade deficit in 2018 was over 600 billion dollars.

• Which do you believe to be the major cause of the trade deficit in recent years? Provide your informed opinion.
• What are the major benefits and costs associated with trade deficit?

Answer 1

A trade deficit occurs when a country's imports exceed its exports during a given time period. It is also referred to as a negative balance of trade.

Reasons for rising trade deficit

1. The most important cause of the increased U.S. trade deficit was the sharp rise in the value of the dollar (appreciation of dollar) which caused the prices of U.S. goods to rise compared to the prices of foreign goods.

2. The strong U.S. economic recovery caused U.S. consumption of goods, including imports, to rise.

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Benefits

The most obvious benefit of a trade deficit is that it allows a country to consume more than it produces. In the short run, trade deficits can help nations to avoid shortages of goods and other economic problems. In some countries, trade deficits correct themselves over time.

Costs

Trade deficits can create substantial problems in the long run. The worst and most obvious problem is that trade deficits can facilitate a sort of economic colonization. If a country continually runs trade deficits, citizens of other countries acquire funds to buy up capital in that nation. That can mean making new investments that increase productivity and create jobs. However, it may also involve merely buying up existing businesses, natural resources, and other assets. If this buying continues, foreign investors will eventually own nearly everything in the country.