10.2Trade Balances in Historical and International Context

Step 9. The merchandise trade balance is the difference between exports of goods and imports of goods—the first number under Balance. Step 10. Now sum up your columns for Exports, Imports, and Balance. The final balance number is the current account balance. The merchandise balance of trade is the difference between exports and imports. In this case, it is equal to $1,046 – $1,562, a trade deficit of –$516 billion. The current account balance is –$419 billion. See the completed Table 10.3. Value of Exports (money flowing Value of Imports (money flowing out of the United States) Balance into the United States) Goods $1,046 $1,562 –$516 Services $509 $371 $138 Income receipts and payments $561 $472 $89 Unilateral transfers $0 $130 –$130 Current account balance $2,116 $2,535 –$419 TABLE 10.3 Completed Merchandise Balance and Current Account Balance

10.2 Trade Balances in Historical and International Context

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Analyze graphs of the current account balance and the merchandise trade balance
• Identify patterns in U.S. trade surpluses and deficits
• Compare the U.S. trade surpluses and deficits to other countries' trade surpluses and deficits

We present the history of the U.S. current account balance in recent decades in several different ways. Figure 10.2 (a) shows the current account balance and the merchandise trade balance—the latter of which is simply the balance on goods exported versus imported—in dollar terms. Figure 10.2 (b) shows the current account balance and merchandise account balance yet again, this time as a share of the GDP for that year. By dividing the trade deficit in each year by GDP in that year, Figure 10.2 (b) factors out both inflation and growth in the real economy.

FIGURE 10.2Current Account Balance and Merchandise Trade Balance, 1960–2020(a) The current account balance and the merchandise trade balance in billions of dollars from 1960 to 2020. The merchandise trade balance is the trade balance on goods only. If the lines are above zero dollars, the United States was running a positive trade balance and current account balance. If the lines fall below zero dollars, the United States is running a trade deficit and a deficit in its current account balance. (b) This shows the same items—trade balance and current account balance—in relationship to the size of the U.S. economy, or GDP, from 1960 to 2020. By either measure, the U.S. balance of trade pattern is clear. From the 1960s into the 1970s, the U.S. economy had mostly small trade surpluses—that is, the graphs in Figure 10.2 show positive numbers. However, starting in the 1980s, the trade deficit increased rapidly, and after a tiny surplus in 1991, the current account trade deficit became even larger in the late 1990s and into the mid-2000s. However, the trade deficit declined in 2009 after the recession had taken hold, then rebounded partially in 2010 and remained stable up through 2019, before falling again in 2020. Access multimedia content (http://openstax.org/books/principles-macroeconomics-3e/pages/10-2-trade- balances-in-historical-and-international-context) Current Account Balance in Billions of Dollars. Table 10.4 shows the U.S. trade picture in 2013 compared with some other economies from around the world. While the U.S. economy has consistently run trade deficits in recent years, Japan and many European nations, among them France and Germany, have consistently run trade surpluses. Some of the other countries listed include Brazil, the largest economy in Latin America; Nigeria, along with South Africa competing to be the largest economy in Africa; and China, India, and Korea. The first column offers one measure of an economy's globalization: exports of goods and services as a percentage of GDP. The second column shows the trade balance. Usually, most countries have trade surpluses or deficits that are less than 5% of GDP. As you can see, the U.S. current account balance is –2.6% of GDP, while Germany's is 8.4% of GDP. Exports of Goods and Services Current Account Balance United States 10.2% –2.9% Japan 15.5% 3.2% Germany 43.4% 7.0% United Kingdom 27.9% –2.6% Canada 29.0% –1.8% Sweden 44.6% 5.7% Korea 36.4% 4.6% Mexico 40.2% 2.4% Brazil 16.9% –1.8% China 18.5% 1.9% India 18.7% 1.2% Nigeria 8.8% –3.9% World - 0.0% TABLE 10.4Level and Balance of Trade (Balance of Payments basis) in 2020 (figures as a percentage of GDP, Source: http://data.worldbank.org/indicator/ BN.CAB.XOKA.GD.ZS)

10.3 Trade Balances and Flows of Financial Capital

LEARNING OBJECTIVES By the end of this section, you will be able to:

• Explain the connection between trade balances and financial capital flows
• Calculate comparative advantage
• Explain balanced trade in terms of investment and capital flows

As economists see it, trade surpluses can be either good or bad, depending on circumstances, and trade deficits can be good or bad, too. The challenge is to understand how the international flows of goods and services are connected with international flows of financial capital. In this module we will illustrate the intimate connection between trade balances and flows of financial capital in two ways: a parable of trade between Robinson Crusoe and Friday, and a circular flow diagram representing flows of trade and payments.