![]() ![]() ![]() However, sustained trade deficits can lead to economic issues such as job losses in industries facing intense foreign competition, and can potentially lead to reliance on foreign creditors.It can allow a nation to consume more than it produces, and provides access to foreign goods and investment Although often viewed negatively, a trade deficit is not automatically a bad thing.This means money is flowing out of the country to foreign entities to purchase imported goods or services. A trade deficit occurs when a country’s imports exceed its exports during a given time period.The phonetic pronunciation of the keyword “Trade Deficit” is: treɪd ˈdɛfɪsɪt. This imbalance potentially indicates economic issues and can influence political decisions on imports and exports. It occurs when the value of the goods and services it purchases from other countries exceeds the value of the products it sells to them. Emergence of scaled competition in an industry from producers in other countries - for example the shift of manufacturing in industries such as textiles and steel to lower-cost countries and regions.Trade deficit is an economic measure of a negative balance of trade where a country’s import costs are greater than its export earnings.Long term decline in the world price of a country’s major export - many countries continue to experience primary product dependency when the trade balance is highly susceptible to volatile commodity prices.Relatively weak productivity - which leads to higher unit costs and therefore a decline in relative cost competitiveness.Low level of capital investment spending which limits the growth of a country’s productive capacity.In the UK for example, research and development spending has remained stubbornly below 2 percent of GDP. Low levels of research and development to help develop new products.In the case of the UK for example, there is a persistent productivity gap measured by output per hour or output per person employed between the UK and many of our major trade competitors. Structural causes refer mainly to longer-term changes in an economy’s structure and supply-side competitiveness. However in large part this has been the consequence of a persistent decline in real per capita incomes and, in the case of Greece, a full-blown depression with real GDP falling by more than 25 percent and consumption of goods and services collapsing by 40 percent. Greece and Spain are two good examples of nations whose external balance has improved in recent years. This is mainly because of a steep fall in employment and real incomes which then leads to a fall in consumer spending. In an economic downturn, the trade deficit tends to improve. This can be offset by an expanding export sector, but when domestic GDP growth is strong, there may not be much spare capacity for exporters to increases their overseas sales. When an economy is in the boom phase of an economic cycle, normally the size of a trade deficit will rise as spending on imports increases. Depending on the price elasticity of demand for exports and imports, a stronger currency might lead to a larger trade deficit Strong exchange rate - if there is an appreciation of the exchange rate, then export prices rise and import prices fall.Growing investment spending - perhaps a significant amount of new capital machinery and technology comes from overseas. ![]() Expanding production - businesses need to import more component parts and raw materials.Increasing consumer spending - perhaps financed by borrowing/debt - as consumption grows (and savings fall) then spending on imports rises.Rising real incomes - leads to an increased demand for imports especially goods and services with a high income elasticity of demand.Some cyclical causes of a trade deficit are summarised below: The world economy goes through a trade and investment cycle affecting for example, the real prices of many internationally traded commodities. One important distinction to make is between cyclical and structural causes:Ĭyclical causes link to the stage of an economic cycle a country might be in and also cyclical changes in different regions and the global economy as a whole. Forecasted trade balance as a share of gross domestic product (GDP) in the United Kingdom (UK) from 2016 to 2022 ![]()
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