The International Trade and Capital Flows

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. [link] (a) shows the current account balance and the merchandise trade balance in dollar terms. [link] (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, [link] (b) factors out both inflation and growth in the real economy.

The first graph shows the current account and merchandise trade balance in nominal dollars. Both lines dropped drastically between 1995 and 2005. In 2013, the current account balance is −422.2, and the merchandise trade balance is −702.284. The second graph shows the current account and merchandise trade balance as percentages of GDP. Both dropped around 1986, but increased gradually until 1991, when both dropped again with the low around 2005. As of 2013, both current account and merchandise credit are around –2% and –4% of the GDP respectively.]
Current Account Balance and Merchandise Trade Balance, 1960–2015. (a) The current account balance and the merchandise trade balance in billions of dollars from 1960 to 2015. 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 2015.

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 [link] 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 has remained stable up through 2016.

[link] 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.

Level and Balance of Trade in 2015 (figures as a percentage of GDP, Source: http://data.worldbank.org/indicator/BN.CAB.XOKA.GD.ZS)
Exports of Goods and Services Current Account Balance
United States 17.6% –2.6%
Japan 16.2% 3.1%
Germany 46.8% 8.4%
United Kingdom 27.2% –5.4%
Canada 31.5% –3.2%
Sweden 45.6% 5.2%
Korea 45.9% 7.7%
Mexico 35.4% –2.9%
Brazil 13.0% –3.3%
China 22.1% 3.0%
India 19.9% –1.1%
Nigeria 10.7% -3.3%
World 0.0%

Key Concepts and Summary

The United States developed large trade surpluses in the early 1980s, swung back to a tiny trade surplus in 1991, and then had even larger trade deficits in the late 1990s and early 2000s. As we will see below, a trade deficit necessarily means a net inflow of financial capital from abroad, while a trade surplus necessarily means a net outflow of financial capital from an economy to other countries.

Self-Check Questions

In what way does comparing a country’s exports to GDP reflect its degree of globalization?

[reveal-answer q=”479611″]Show Answer[/reveal-answer]
[hidden-answer a=”479611″]GDP is a dollar value of all production of goods and services. Exports are produced domestically but shipped abroad. The percent ratio of exports to GDP gives us an idea of how important exports are to the national economy out of all goods and services produced. For example, exports represent only 14% of U.S. GDP, but 50% of Germany’s GDP[/hidden-answer]

At one point Canada’s GDP was $1,800 billion and its exports were $542 billion. What was Canada’s export ratio at this time?

[reveal-answer q=”73675″]Show Answer[/reveal-answer]
[hidden-answer a=”73675″]Divide $542 billion by $1,800 billion.[/hidden-answer]

The GDP for the United States is $18,036 billion and its current account balance is –$484 billion. What percent of GDP is the current account balance?

[reveal-answer q=”509848″]Show Answer[/reveal-answer]
[hidden-answer a=”509848″]Divide –$400 billion by $16,800 billion.[/hidden-answer]

Why does the trade balance and the current account balance track so closely together over time?

[reveal-answer q=”7035″]Show Answer[/reveal-answer]
[hidden-answer a=”7035″]The trade balance is the difference between exports and imports. The current account balance includes this number (whether it is a trade balance or a trade surplus), but also includes international flows of money from global investments.[/hidden-answer]

 

Review Question

In recent decades, has the U.S. trade balance usually been in deficit, surplus, or balanced?

 

Critical Thinking Questions

If a country is a big exporter, is it more exposed to global financial crises?

If countries reduced trade barriers, would the international flows of money increase?

Glossary

exports of goods and services as a percentage of GDP
the dollar value of exports divided by the dollar value of a country’s GDP

License

Icon for the Creative Commons Attribution 4.0 International License

Principles of Macroeconomics 2e by OpenStax is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

Share This Book