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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

this means that the demand curve have negative relationship with the price ..which means that when high price low demand of the product and vice versa so higher price will shirnk the demand of product
Ahsan Reply
Higher price level ∴Real value of household wealth increase ∴Net export decrease ∴More money needed, interest rate increase, investment decrease
sirius
a person has 60birr to buy two commodities,x and y the price of x is four birr unit the price of y is two birr unit his utility functio given by u=xy+2x determine the budget equation
Mohammed Reply
What are the various reasons for the Federal Reserve to increase the fed rates?
AMEEN Reply
What is unemployment
Mijash Reply
Unemployment is a term used to describe people who do not hold a paying job
JASON
what are the causes of unemployment
evans
unemployment refer to the situation in which people searching job but they have no. it also refers in which marginal productivity in zero.
Ramu
Causes of unemployment are: 1: Over Population 2: Break down of the family system 3: Rural/Urban Migration
Umar
unemployment simply means, in the situation where by people are looking for a job and their could achieve it.
Faruk
suppose you're the economist of ethiopia; when the country is face high rate of inflation what you recommend as one economist?
Roba Reply
if consumer spend all their incomes on consumption what does it mean?
Roba
if the government spends more of its revenue on development infrastructure from the budget it have and lower tax collection the budget deficit will run why?
Roba
because tax is less than revenue
Bhat
what is demand
Sunday Reply
Demand is the quantity of goods and services that consumers are willing and able to purchase at various prices over a given period of time
adu
demand is the ability back the willingness to purchase something with a specific price within a period of time
Ousman
the total value of goods and services produced by a coutry in it's own territorial area( mainly in a year) is called GDP
fareeha Reply
GDP- the total value of goods produced and services provided in a country during one year.
fareeha
What is the formula for propensity to save
Zubair
there is no formula for propensity to save but it has a two types one is average propensity to save and marginal propensity to save where Apc is equal to saving divide by income and mpc is equal to change in saving due change in income
Bhat
yes ooo
Sunday
yes
Ahmed
okay
kawu
what is time in economics?
Sunday
what is gross domestic product
Moonga Reply
what is macroeconomics
Dickison Reply
this is the branch of economics that deals with wide range
Ousman
what is macroeconomics
Majid Reply
what is macroeconomic analysis
Deogratius Reply
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment Read m
wasay
Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment
wasay
what is wage in economics?
Sunday
what is economic
Wajeed Reply
Economics is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. 
ninad
Economics is the brench of science that deals with the study of human behavior as it related to end or scare means which have alternative used.
Jimmy
Economics is a science that studies human behavior as a relationship between ends and scarce means which have alternative uses
Don
Economics as a social science does not have a definite definition, because it has been defined by many economist the most appropriate one was the one defined by Lord Lionel Robbin in 1932. He defined economics as a social science which study human behavior as a relationship between end and scare m..
Ernest
what is inflation
Junaid Reply
Inflation is simply a situation in an economy where there is a persistent rise or increase in the prices of goods and services in a particular year(say current year)
JERRY
It can still be defined as a situation in an economy where there's a persistent fall in the value of money
JERRY
it is the persistent rise in the general price of goods and services in an economy leading to the fall in the values of money
Muafue
It could mean the central bank has a deficit in reserve unable to cope with low export and exit of foreign investments.
Wong
inflation is the general increase in a commodity with in a country.
Jimmy
Mr Fallah please take the definition again that one is not clear
Muafue
the persistence in general price of commodities
ezechy
The persistence rise in the general price level
Muafue
The persistence rise in general price of commodities
Delhill
Inflation is the persistent increase in price of goods and services over a given period of time.
Ernest
what is willingness
Bilal Reply
Is a person Able,Capable and Anxious to something
Muafue
Is when a person is able,capable and Anxious to do something
Muafue
thanks sir g.
Bilal
u are welcome
Muafue
where you from
Bilal
Cameroon
Muafue
And you
Muafue
Pakistan
Bilal
How far are you in Education
Muafue
who about my question What is MPC
sabawoon
is marginal propensity to consume
Muafue
a little more
sabawoon
sorry muafue sir you are little bit wrong about willingness *willingness reffers how much wants . it could be wants for payment or wants for something to do.
Masadaq
MPC reffers *How much want to consume*.
Masadaq
MPC is Marginal Propensity to Consume. MPC is proportion of additional spent on consumption.
Bon
MPC is Marginal Propensity to Consume. MPC is the proportion of additional income spent on consumption.
Bon
What is difference between GNP and GDP?
Zahid
GNP is gross national product. In calculating GNP we include net national income from abroad while GDP is gross domestic product and in calculating it we use on expenditure, income and output from within the country. My name is JERRY NGONDA from Cameron
JERRY
GNP.the total value of good $service currently produce w a given period of time by domestic owner GNP=NFI+GDP:GDP is a market value of final good $service currently produce in a given period of time w in a country boundery or territors.its take produce currently $etc
tade
yes.no suggestions
tade
good Tade Feyera
Masadaq
Tade Feyera can you send me your whatsap contact number.
Masadaq
when spending by the federal government exceeds net taxes?
stefany Reply
explain the difference between macroeconomics and microeconomics
Rahmo
Macroeconomics is the study of economics at the aggregate level while Micro is at the individual level.
Umar
Both indifference curve and isoquant do not intersect TRUE OR FALSE and justify your statement
John
what is long run and short run period
Kennedy

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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