Reading Response 9
Econ 811
Ashita Samant
Answer1:
Main accounts of the US balance of payments:
Current Account: This account records the monetary value of the international flows
associated with transactions in goods and services, income flows and unilateral transfers.
Capital and Financial Accounts: This account includes all the international purchases and
sales of assets. Transactions include both private sector and central bank transactions.
Capital transactions consist of capital transfers, acquisition and disposal of certain nonfinancial assets.
For the US economy, the policy concerns are over the trade deficits than the trade
surplus. Trade deficit may result in the fall in the international currency markets as
dollar outpayments exceed dollar impayments. A current account deficit of 668.1 billion
in 2004, where imports exceed exports resulted in decreasing net foreign investment for
the United States. At the same time in 2004, US generated a trade surplus of $47.8
billion on service transactions, implying that the US transferred fewer goods to other
nations than it received from them during this period. Overall, the US balance of
payments has been in surplus until recent times of the financial crisis. This means that
any force leading to an increase or decrease in one balance of payments account sets in
motion a process leading to exactly offsetting changes in the balances of other accounts.
Answer 2:
There are many views to nation carrying a trade deficit. Some of them are:
A country can have a trade deficit either because it is borrowing or because it has lent
some loans in the past for which it is currently being repaid.
A trade account deficit occurs when a country spends more than its own borrowing
capacity. According to Alessandria, a trade account deficit proves to be beneficial
because it shifts world production to the most productive sectors of the economy and
allows individuals to smoothen out their consumption over the entire length of the
business cycle. Also, a trade account deficit occurs when a country’s firm or government
invests in physical capital to take advantage of productive opportunities. These
investments expand the infrastructure and take advantage of new technologies. This
increase in investment is financed in part by borrowing in international financial markets.
When the firms or governments repay this borrowing the trade balance increases
leading to a trade surplus. So in many ways, a trade deficit may prove to be a robust
boost for the economy.
Answer 3
The strengthening or weakening of the dollar can affect many parties, consumers,
tourists, investors, exporters and importers.
Advantages to the Appreciating dollar are as follows:
US consumers see lower prices on foreign goods which helps keep US inflation low. With
a strong dollar, US tourists can benefit when they travel abroad.
Disadvantages of a Strong Dollar:
US exporting firms find it difficult to conduct business in foreign markets. Importcompeting US industries are unable to compete with low priced foreign goods and
Foreign tourists find it more expensive to visit the US.
Advantages of a Weak Dollar:
US firms find it easier to sell their goods in foreign markets. Firms in the US face less
pressure to keep prices low and more international tourists could afford to visit the US.
Disadvantages of a Weak Dollar:
US consumers face higher prices on foreign goods. This contributes to higher inflation
making it more difficult for US consumers/citizens to travel to foreign locations for
holidays.