Macroeconomics: Understanding US Trade Deficit and Balance of Payments

Running head: MACROECONOMICS
Macroeconomics
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MACROECONOMICS
Introduction
In the modern financial world, lots of puzzles are happening on daily basis. These
kinds of activities are actually shaking the level of world production ability. In the country
like US, the trade deficit is one of the biggest issues. After the World War II, a new monetary
system in the name of Bretton wood was formed and the main thing that the Bretton wood
was that they claimed dollar as the international currency. The exchange rate of the gold is
around $35 per ounce. However, in 1960, the expansionary growth in US demand and the
collapse of Bretton wood actually forced many countries doing trade with US to exchange
dollars with gold that forced the gold reserve of the country to deplete. Both the current
account and the capital in the US has started to fall. This has forced the US government to
change their exchange rate quite a number of times. In order to provide the remedies for the
trade deficits, the country has been taking steps in the form of trade restrictions and other
monetary actions.
Discussion
Concepts regarding BOT and BOP
Balance of trade is mainly looking at the development of better trade scenario in the
economy of US. Due to increasing demand of the US gold as securities making it more
fragile. However, it has been seen that US trade deficit is going deep and the balance of the
payments are going aligned with the trade balance. The increased amount of asset holdings
and decreased yielding of the assets is one of main reason that is highlighting the trade
deficit.
Trade deficit
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Trade deficit is mainly due to the development of the failures that mainly happens in
the economy due to the situation when export earning is smaller than import spending.
However, in case of US, due to the shift of the profit factors, the US economies are going
back and receiving slow growths in the economies. Due to the trade deficit the US economy
is not getting any kind of business and the innovation is not getting any kind of business
drives.
Analysis of BOT and BOP
According to Clausing (2016), the gross income of United States is showing how the
multinational firms and their affiliated business in abroad are earning their incomes. In order
to make an improvement in the balance of payments countries like Netherlands, Ireland,
Luxembourg, Bermuda, Switzerland, Singapore, and UK Islands are taking the policy of
effective tax rates in order to increase more number of investments in the economy. Through
the development of the tax rate the capital account and current account of the above
mentioned countries are improving. Through the implementation of effective tax rates, the
countries accounts about 50.1% in the foreign profits and about 52.3% of the direct
investment rates.
Figure 1: Earning from foreign profits and direct investments
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MACROECONOMICS
(Source: Clausing, 2016)
From the above figure, Netherlands is having more income from the direct
investments earning. In most of the financial analysis, the relationship among the economic
activities that are happening within the economy is entirely depending on the geography of
the country. Due to semi elasticity property of the revenue generation and the tax rates
prevailing in the foreign countries are helping in the diminish tendency of the Balance of
payments. Due to this features, most of the US affiliated companies are not being able to
generate huge amount of profits. On the other hand, as opined by Clausing (2016) the
revenue costs for the US government from profit shifting is increasing by huge margin. The
revenue increased to $111 million from $77 million over 30% of the business profits.
Stiglitz (2016) opined that in country like US, government is not focussing on the
development of banks that are mainly helpful for the development of the small and medium
scale industries. In US, the FED government are taking the initiative to increase the
investments on the big banks that will increase their innovative technologies. Through most
of these banks are not at all significant for the small and medium scale industries, but
however, the contributions that these banks does on the SME is highly significant in nature.
Most of the economists in the United States have claimed the fact that government should
increase the channels of investments by improving the credit channel. This will increase the
investments that will help the economy in building better technologies than just increasing
the price of the assets that will create investments bubble. The increasing amount of
underinvestment by the government in the development of research wings are actually
making the scenario of BOP stickier compared to any other country.
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