under what conditions would a nation be viewed as being neither a net borrower nor a net lender in the international economy?
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The Difference between Level of Trade and the Trade Balance – Principles of Macroeconomics 2e
THE DIFFERENCE BETWEEN LEVEL OF TRADE AND THE TRADE BALANCE
Learning Objectives
By the end of this section, you will be able to:
Identify three factors that influence a country’s level of trade
Differentiate between balance of trade and level of trade
A nation’s level of trade may at first sound like much the same issue as the balance of trade, but these two are actually quite separate. It is perfectly possible for a country to have a very high level of trade—measured by its exports of goods and services as a share of its GDP—while it also has a near-balance between exports and imports. A high level of trade indicates that the nation exports a good portion of its production. It is also possible for a country’s trade to be a relatively low share of GDP, relative to global averages, but for the imbalance between its exports and its imports to be quite large. We emphasized this general theme earlier in Measuring Trade Balances, which offered some illustrative figures on trade levels and balances.
A country’s level of trade tells how much of its production it exports. We measure this by the percent of exports out of GDP. It indicates the degree of an economy’s globalization. Some countries, such as Germany, have a high level of trade—they export almost 50% of their total production. The balance of trade tells us if the country is running a trade surplus or trade deficit. A country can have a low level of trade but a high trade deficit. (For example, the United States only exports 13% of GDP, but it has a trade deficit of over $500 billion.)
Three factors strongly influence a nation’s level of trade: the size of its economy, its geographic location, and its history of trade. Large economies like the United States can do much of their trading internally, while small economies like Sweden have less ability to provide what they want internally and tend to have higher ratios of exports and imports to GDP. Nations that are neighbors tend to trade more, since costs of transportation and communication are lower. Moreover, some nations have long and established patterns of international trade, while others do not.
Consequently, a relatively small economy like Sweden, with many nearby trading partners across Europe and a long history of foreign trade, has a high level of trade. Brazil and India, which are fairly large economies that have often sought to inhibit trade in recent decades, have lower levels of trade; whereas, the United States and Japan are extremely large economies that have comparatively few nearby trading partners. Both countries actually have quite low levels of trade by world standards. The ratio of exports to GDP in either the United States or in Japan is about half of the world average.
The balance of trade is a separate issue from the level of trade. The United States has a low level of trade, but had enormous trade deficits for most years from the mid-1980s into the 2000s. Japan has a low level of trade by world standards, but has typically shown large trade surpluses in recent decades. Nations like Germany and the United Kingdom have medium to high levels of trade by world standards, but Germany had a moderate trade surplus in 2015, while the United Kingdom had a moderate trade deficit. Their trade picture was roughly in balance in the late 1990s. Sweden had a high level of trade and a moderate trade surplus in 2015, while Mexico had a high level of trade and a moderate trade deficit that same year.
In short, it is quite possible for nations with a relatively low level of trade, expressed as a percentage of GDP, to have relatively large trade deficits. It is also quite possible for nations with a near balance between exports and imports to worry about the consequences of high levels of trade for the economy. It is not inconsistent to believe that a high level of trade is potentially beneficial to an economy, because of the way it allows nations to play to their comparative advantages, and to also be concerned about any macroeconomic instability caused by a long-term pattern of large trade deficits. The following Clear It Up feature discusses how this sort of dynamic played out in Colonial India.
Are trade surpluses always beneficial? Considering Colonial India.
India was formally under British rule from 1858 to 1947. During that time, India consistently had trade surpluses with Great Britain. Anyone who believes that trade surpluses are a sign of economic strength and dominance while trade deficits are a sign of economic weakness must find this pattern odd, since it would mean that colonial India was successfully dominating and exploiting Great Britain for almost a century—which was not true.
Instead, India’s trade surpluses with Great Britain meant that each year there was an overall flow of financial capital from India to Great Britain. In India, many heavily criticized this financial capital flow as the “drain,” and they viewed eliminating the financial capital drain as one of the many reasons why India would benefit from achieving independence.
Final Thoughts about Trade Balances
Trade deficits can be a good or a bad sign for an economy, and trade surpluses can be a good or a bad sign. Even a trade balance of zero—which just means that a nation is neither a net borrower nor lender in the international economy—can be either a good or bad sign. The fundamental economic question is not whether a nation’s economy is borrowing or lending at all, but whether the particular borrowing or lending in the particular economic conditions of that country makes sense.
Econ 202 chapter 10 Flashcards
Start studying Econ 202 chapter 10. Learn vocabulary, terms, and more with flashcards, games, and other study tools.
Econ 202 chapter 10
A country finds itself in the following situation: a government budget deficit of $800; total domestic savings of $1800, and total domestic physical capital investment of $1300. According to the national saving and investment identity, what is the current account balance?
A. deficit of $1300 B. surplus of $300 C. deficit of $300 D. surplus of $1300
Click card to see definition 👆
C. deficit of $300
Click again to see term 👆
What is the most common method of measuring flows of trade?
A. amount of physical items transported between countries
B. amount of manufactured items transported by truck
C. comparing annual amounts of goods and services exchanged between countries
D. comparing exports of goods, services, and financial capital between countries
Click card to see definition 👆
D. comparing exports of goods, services, and financial capital between countries
Click again to see term 👆
1/19 Created by Jakeisfum
Terms in this set (19)
A country finds itself in the following situation: a government budget deficit of $800; total domestic savings of $1800, and total domestic physical capital investment of $1300. According to the national saving and investment identity, what is the current account balance?
A. deficit of $1300 B. surplus of $300 C. deficit of $300 D. surplus of $1300 C. deficit of $300
What is the most common method of measuring flows of trade?
A. amount of physical items transported between countries
B. amount of manufactured items transported by truck
C. comparing annual amounts of goods and services exchanged between countries
D. comparing exports of goods, services, and financial capital between countries
D. comparing exports of goods, services, and financial capital between countries
A country's current national savings and investment identity is expressed in algebraic terms as I - S - (T - G) = (M - X). Assume that the level of domestic savings rises, while the level of domestic investment and private saving remains unchanged. In this instance:
A. less foreign financial capital is required to meet investment needs.
B. government policy will involve increasing private savings.
C. the country's trade deficit will decline.
D. all of the above D. all of the above
The term _____________ describes circumstances where a country's imports exceed its exports.
A. trade imbalance B. trade balance C. trade surplus D. trade deficit D. trade deficit
The ________________ refers to the gap that can exist between what a nation's _____________, and a nation's ____________________.
A. balance of trade; producers sell abroad; imports
B. merchandise trade balance; exports; imports
C. trade surplus; exported services; imported goods
D. trade deficit; producers purchase abroad; exports
A. balance of trade; producers sell abroad; imports
In most high-income economies, including the United States, goods currently make up ___________, while services currently compose ____________.
A. more than half of total production; less than half of total production
B. less than half of total production; more than half of total production
C. the merchandise trade balance; the capital trade balance
D. the merchandise trade balance; the retail trade balance
B. less than half of total production; more than half of total production
Economists typically rely on a broader measure of international trade known as the ___________________, which includes _____________________________.
A. current trade balance; foreign aid announced by the government.
B. current trade balance; finance, law, and software product design.
C. current account balance; telecommunications, computers, finance, law, and advertising.
D. current account balance; goods, services, international income flows, and foreign aid.
D. current account balance; goods, services, international income flows, and foreign aid.
A recession tends to make a _____________________.
A. trade surplus smaller
B. trade deficit smaller
C. trade deficit larger
D. both a and b above
B. trade deficit smaller
Under what conditions would a nation be viewed as being neither a net borrower nor a net lender in the international economy?
A. it has a low level of trade and a large trade surplus
B. it has a medium to high level of trade and a moderate trade surplus
C. it has a high level of trade and a moderate trade deficit
D. its trade balance is zero
D. its trade balance is zero
Under what circumstances would it most likely be considered beneficial for a government to be a large borrower of foreign investment capital?
A. never as there is no economic merit in a policy of running trade deficits
B. if the inflow of capital is absorbed by greater government borrowing
C. when borrowing larger amounts is based on unconventional macroeconomic wisdom
D. when those funds are invested in a way that sustains economic growth over time
D. when those funds are invested in a way that sustains economic growth over time
If imports ______________, then the economy is said to have a trade deficit.
A. precede exports
9.6 The Difference Between Level of Trade and the Trade Balance
9.6 The Difference Between Level of Trade and the Trade Balance
SECTIONS Learning Objectives
Final Thoughts about Trade Balances
Learning Objectives
By the end of this section, you will be able to do the following:
Identify three factors that influence a country's level of trade
Differentiate between balance of trade and level of trade
A nation’s level of trade may at first sound like much the same issue as the balance of trade, but these two are actually quite separate. It is perfectly possible for a country to have a very high level of trade, measured by its exports of goods and services as a share of its GDP, while it also has a near-balance between exports and imports. A high level of trade indicates that a good portion of the nation’s production is exported. It is also possible for a country’s trade to be a relatively low share of GDP, relative to global averages, but for the imbalance between its exports and its imports to be quite large. This general theme was emphasized earlier in Measuring Trade Balances, which offered some illustrative figures on trade levels and balances.
A country’s level of trade tells how much of its production it exports. This is measured by the percent of exports out of GDP. It indicates how globalized an economy is. Some countries, such as Germany, have a high level of trade—they export almost 50 percent of their total production. The balance of trade tells us if the country is running a trade surplus or trade deficit. A country can have a low level of trade but a high trade deficit. For example, the United States only exports 14 percent of GDP, but it has a trade deficit of $540 billion.
Three factors strongly influence a nation’s level of trade: the size of its economy, its geographic location, and its history of trade. Large economies like the United States can do much of their trading internally, while small economies like Sweden have less ability to provide what they want internally and tend to have higher ratios of exports and imports to GDP. Nations that are neighbors tend to trade more, since costs of transportation and communication are lower. Moreover, some nations have long and established patterns of international trade, while others do not.
Consequently, a relatively small economy like Sweden, with many nearby trading partners across Europe and a long history of foreign trade, has a high level of trade. Brazil and India, which are fairly large economies that have often sought to inhibit trade in recent decades, have lower levels of trade. Whereas, the United States and Japan are extremely large economies that have comparatively few nearby trading partners. Both countries actually have quite low levels of trade by world standards. The ratio of exports to GDP in either the United States or in Japan is about half of the world average.
The balance of trade is a separate issue from the level of trade. The United States has a low level of trade, but had enormous trade deficits for most years from the mid-1980s into the 2000s. Japan has a low level of trade by world standards, but has typically shown large trade surpluses in recent decades. Nations like Germany and the United Kingdom have medium to high levels of trade by world standards, but Germany had a moderate trade surplus in 2008, while the United Kingdom had a moderate trade deficit. Their trade picture was roughly in balance in the late 1990s. Sweden had a high level of trade and a large trade surplus in 2007, while Mexico had a high level of trade and a moderate trade deficit that same year.
In short, it is quite possible for nations with a relatively low level of trade, expressed as a percentage of GDP, to have relatively large trade deficits. It is also quite possible for nations with a near balance between exports and imports to worry about the consequences of high levels of trade for the economy. It is not inconsistent to believe that a high level of trade is potentially beneficial to an economy, because of the way it allows nations to play to their comparative advantages, and to also be concerned about any macroeconomic instability caused by a long-term pattern of large trade deficits. The following Clear It Up feature discusses how this sort of dynamic played out in Colonial India.
ARE TRADE SURPLUSES ALWAYS BENEFICIAL? CONSIDERING COLONIAL INDIA.
India was formally under British rule from 1858–1947. During that time, India consistently had trade surpluses with Great Britain. Anyone who believes that trade surpluses are a sign of economic strength and dominance while trade deficits are a sign of economic weakness must find this pattern odd, since it would mean that colonial India was successfully dominating and exploiting Great Britain for almost a century, which was not true.
Instead, India’s trade surpluses with Great Britain meant that each year there was an overall flow of financial capital from India to Great Britain. In India, this flow of financial capital was heavily criticized as the drain, and eliminating the drain of financial capital was viewed as one of the many reasons why India would benefit from achieving independence.
Final Thoughts about Trade Balances
Trade deficits can be a good or a bad sign for an economy, and trade surpluses can be a good or a bad sign. Even a trade balance of zero, which just means that a nation is neither a net borrower nor lender in the international economy, can be either a good or bad sign. The fundamental economic question is not whether a nation’s economy is borrowing or lending at all, but whether the particular borrowing or lending in the particular economic conditions of that country makes sense.
Guys, does anyone know the answer?