<< Chapter < Page Chapter >> Page >

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, 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.

It is interesting to reflect on how public attitudes toward trade deficits and surpluses might change if we could somehow change the labels that people and the news media affix to them. If a trade deficit was called “attracting foreign financial capital”—which accurately describes what a trade deficit means—then trade deficits might look more attractive. Conversely, if a trade surplus were called “shipping financial capital abroad”—which accurately captures what a trade surplus does—then trade surpluses might look less attractive. Either way, the key to understanding trade balances is to understand the relationships between flows of trade and flows of international payments, and what these relationships imply about the causes, benefits, and risks of different kinds of trade balances. The first step along this journey of understanding is to move beyond knee-jerk reactions to terms like “trade surplus,” “trade balance,” and “trade deficit.”

More than meets the eye in the congo

Now that you see the big picture, you undoubtedly realize that all of the economic choices you make, such as depositing savings or investing in an international mutual fund, do influence the flow of goods and services as well as the flows of money around the world.

You now know that a trade surplus does not necessarily tell us whether an economy is doing well or not. The Democratic Republic of Congo ran a trade surplus in 2013, as we learned in the beginning of the chapter. Yet its current account balance was –$2.8 billion. However, the return of political stability and the rebuilding in the aftermath of the civil war there has meant a flow of investment and financial capital into the country. In this case, a negative current account balance means the country is being rebuilt—and that is a good thing.

Key concepts and summary

There is a difference between the level of a country’s trade and the balance of trade. The level of trade is measured by the percentage of exports out of GDP, or the size of the economy. Small economies that have nearby trading partners and a history of international trade will tend to have higher levels of trade. Larger economies with few nearby trading partners and a limited history of international trade will tend to have lower levels of trade. The level of trade is different from the trade balance. The level of trade depends on a country’s history of trade, its geography, and the size of its economy. A country’s balance of trade is the dollar difference between its exports and imports.

Trade deficits and trade surpluses are not necessarily good or bad—it depends on the circumstances. Even if a country is borrowing, if that money is invested in productivity-boosting investments it can lead to an improvement in long-term economic growth.

Questions & Answers

wat factor give raise to monopoly
Ebenezer Reply
a product which is unique /it has very less substitutes in the market. so this product has no much competition .... for example , railways
mikey
its a monopoly
mikey
does monology has factors or it has merits n demerits
rivan
please explain what is elasticity of supply
Austine Reply
is the responsiveness of quantity supplied of commodity to changes in its own price
rivan
what is the cause of a country's population
Destiny Reply
what is producer surplus
Destiny Reply
is the excess earns btn wat a producer was willing to charge for e commodity and wat actually receives after selling it
rivan
OK good
Destiny
yeap
Bright
what is supply curve
Destiny Reply
are curve that do not obey the law of supply eg aren't +ve
rivan
half of 1%
Destiny
as in what do u mean by that
rivan
it simply shows the quantity of goods that a film is willing to supply at each price of a commodity
Destiny
OK what is the law of supply as u said
Destiny
It is the indifference curve that indicates the aggregate responsiveness of supply to the price of a commodity, and sometimes its demand of that same commodity.
Gh
nice
Destiny
pls explain how indifference curve connects to the aggregate responsiveness of supply to the price of a commodity
JOSHUA
law of supply according to me states that wen thea z higher price of commodity, the higher will be the supply and lower the supply will be for a commodity other factors remain constant
rivan
Joshua be clear to your QN plizzz
rivan
pls read Gh's comment and break down for me
JOSHUA
may be he can explain more because am am also not getting what he was meaning in that statement
rivan
plizzz GH explain to us
rivan
When demand and supply intersection
Pronoy
then it z called what
rivan
can I learning what is meaning off economics
Jimcaale
can you tall me what is meaning
Jimcaale
good
abubakar
please oligopoly explan.......
Zahid
in oligopoly there is a competition between companies, becoz all those companies produce almost similar products in monopoly , product has no substitutes in the market for competition, so people have no choice to choose another similar product over this, becoz there is no similar product
mikey
oligopoly : mobile phone manufacturing companies have huge competition over one another
mikey
what is consumers surplus
Destiny Reply
is a difference btn consumers planned expenditure and actual experience on the commodity
rivan
OK good
Destiny
What exactly are factors that affects Demand and Supply?
Chandrapaul Reply
demand factors price o commodity size o population level o advertising season 4 commodity testes and preferences price o other related commodity level o consumers income government policy on taxation
rivan
supply factors general price level natural factor level o taxation technology political climate cost o production number o producers aggregate demand working conditions
rivan
yea___ Demographical psychographical geographical factors also account for determination of demand and supply
Gh
definition of economics
Emmanuel Reply
economics means to manage the limited resources one has in order to maximize satisfaction.
sekou
Economic is a science which study of human behavior as a relationship between and scare means which have alternative uses"
Jacob
what is price elasticity of supply
Destiny Reply
What is the law of demand and supply
Destiny
This is when there is a greater percentage change in the supply of commodities as per the percentage change in price. More producers tend to supply more when there is a higher change in the price of commodities and vice versa when price drops.
Gh
this seems to explain making decisions on the margins very clearly
JOSHUA Reply
what are the importance of studying Economics ?
Amoako Reply
Economization
Zeleman
to relate economic principles to the problems o development. exposes students to e future. acquire knowledge. etc ....
rivan
it teaches how to make choice and decisions in our homes and every across the nation
Destiny
what is price elasticity of supply
Destiny
five definition of economic s
Emmanuel
what is monopoly
Baku Reply
is a structure where one seller of a commodity has no close substitute with very many buyers
rivan
tanx
Baku
a market structure where a particular good has no close substitutes
Koushik
examples railways
Shashank
is one man business where there is no competetor/competetion and vice versa
Destiny
what is income elasticity of demand.
kwagala Reply
percentage change in quantity demanded/percentage change in income
Koushik
or is the measure of degree of responsiveness o quality demanded o the commodity to change in the income of consumer
rivan
percentage change in quantity ÷ percentage change in income
Baku
it the percentage change in quantity over percentage in surply
Destiny
the percentage change in quantity over percentage change in income at the end of the day's work done
Destiny
what is medium
Chinedu Reply
what is medium in terms of economics
Chinedu
as u mean medium of exchange or just as a word
rivan
Your question is not clear @Chinedu. In economics medium is often used in relation to time e.g medium term. So you need to be more specific on which medium you mean. Otherwise it "medium" means what it means everywhere else.
elizabeth
what is medium of exchange
JOSHUA
What is the difference between inferior goods and complementary goods
Bernard Reply
inferior goods are goods whose demand reduces as consumers income increases
rivan
while complementary goods are goods which are jointly demand
rivan
Wow thanks
Bernard
you are welcome
rivan

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask