Trade deficits can be a good or bad for an economy, but trade surpluses can also be a good or a bad sign. Even a trade balance of zero meaning that a nation is neither a net borrower nor lender in the international economy can be either positive or negative.
Components of a National Account Balance
· Goods
· Services
· Income receipts and payments
· Unilateral transfers
In the past it was common to track the physical items that were transported by air, ocean or ground between countries as a way of measuring the balance of trade. This measurement is called the merchandise trade balance. In most high-developed economies, goods make up less than half of a country’s total production, while services compose more than half. The last two decades have seen a surge in international trade in services, fueled by technological innovation in telecommunications and computers that made it possible to export or import services like telephone answering service, financial, law, advertising, management consulting, software, construction engineering, and product design among others. Most world trade still is in the form of goods rather than services, and the merchandise trade balance is still posted by governments and reported by newspapers. In economic analysis, however, one must rely on broader measures such as the balance of trade or the current account balance which includes other international flows of capital and foreign aid.
Overall trade in services is still relatively small compared to trade in goods, the importance of services has expanded substantially over the last few decades.
In reference to the third component of the current account balance, labeled “income payments,” it accounts for the money received by U.S. financial investors on their foreign investments and payments to foreign investors who had invested their funds in the U.S. The reason for including this money on foreign investment in the total measure of trade, along with goods and services, is that, from an economic perspective, income is just another economic transaction as equivalent to the shipments of cars or wheat or any other commodity.
The last item of the current account balance is the unilateral transfers of funds, which are payments made by government, private charities, or individuals where money is sent abroad without any link to merchandise or service. Foreign aid or military assistance to other countries qualifies in this category, as does it spending for charities of poverty or social programs.
When a person from the United States spends money overseas, it is also counted in this category. The current account balance considers these unilateral payments as imports, because they involved a stream of payments leaving the country.
Public opinion regarding trade deficits and surpluses might change if we the review the labels if for instance a trade deficit is called obtaining foreign direct investment and trade surplus renamed investing abroad the negative connotations of labels can be dispensed with. The relationships between trade flows of merchandise, services and flows of international payments must be clearly understood because these relationships are about the causes, benefits, and risks of different kinds of trade balances.
For example the United States exports 14% of GDP while Germany exports about 50% of its GDP.
What are the consequences?
It indicates that Germany has a higher level of trade than the United States whilst the United States has a large domestic economy so its internal trade is voluminous. As a result a large economy tends to have lower levels of international trade and it has little impact on its trade imbalance. Moreover, an imbalance between domestic investment by government and private sector contrasted with national saving will always lead to a trade imbalance, but has little to do with the level of trade.
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