Question

A nation is enriched as its balance -of -trade surplus grows, so policy should always be aimed at maximizing the trade surplus. Is this quotation correct? why or why not? Discuss using the terminology and techniques discussed in class, including trade policy, welfare analysis, foreign exchange markets and the balance of payments.

Answer 1

Most economies try to create trade strategies which foster a trade surplus. They deem that a surplus is a favorable trade balance as it is like earning a profit as a nation. Economies prefer to sell more goods & obtain more capital for their citizens. It converts into a better standard of living. Their firms also obtain a competitive advantage in expertise by manufacturing all the exports. They recruit more employees, lessening unemployment levels & generating greater incomes.

To sustain this favorable balance of trade, leaders usually use trade protectionism. They shield domestic firms thru tariff imposition, quotas, or subsidization of imports. This does not work for very long. Soon other nations react with their protectionist procedures. Such a trade war diminishes global trade for all economies.

But at times a trade deficit is the more favorable trade balance. It depends upon where the nation stands in its business cycle. For instance, Hong Kong runs a trade deficit. But most of its imports are raw materials which it transforms into finished products & then exports. This provides it a competitive advantage in production & finance. It creates a better standard of living. Canada's minor trade deficit is an outcome of its economic growth. Its citizens enjoy a superior lifestyle made possible by diverse imports.

Romania's erstwhile dictator, Ceausescu, generated a trade surplus which hurt the economy. He utilized protectionism to boost domestic firms. He also compelled the Romanians to save rather than spending on imports. This led to a low standard of living.

Occasionally, a balance of trade surplus is unfavorable . Japan & China are both dependent upon exports to propel economic growth. They must buy considerable sums of U.S. Treasurys to keep the dollar's worth high & the worth of their currencies low. This is how they keep their exports economically priced & uphold their balance of trade surplus. But this export-propelled strategy implies that they rely upon U.S. consumers & foreign policy. Additionally , their national market is feeble. Japanese & Chinese residents must save to take care of their old age as their governments do not have robust social services.