International Trade and America's Place in the Global Economy - Balance Of Trade

When a country sells its goods and services to consumers in other nations, it is exporting these goods and services. When a country buys goods and services from producers in another country, it is importing these goods and services. The difference between exports and imports is known as the balance of trade (balance of trade = exports − imports).

The U.S. government is aware of the importance of pursuing a balance-of-trade surplus, in which the value of goods exported is greater than the value of goods imported. However, as shown in Table 3.2, the United States has seen a trade deficit every year since 1976, with record levels reached in recent years. The United States has performed no better in its current account balance, a measure that includes the balance of trade as well as investment by foreigners in U.S. businesses and government bonds. Table 3.3 shows balances from 2001 through 2003 broken down into goods, services, and foreign investment. According to a March 2005 press release from the Bureau of Economic Analysis, the current account balance reached a record deficit in 2004 of $665.9 billion. This was up 25.5% from the 2003 figure of $530.7 billion, which was also a record.

The U.S. economy has thus far proved resilient in the face of such enormous and ever-mounting deficits, but some economists are concerned about the risks of these imbalances. The main reason foreign countries invest in the United States is because of the strength of the U.S. dollar. If U.S. trade deficits persist, foreign investors may lose interest in holding dollar-denominated investments. A drop in foreign investment could send the stock and bond markets plummeting and force interest rates up.