After the financial crisis which peaked in the year 2008, the United States economy has seen several changes. One of the changes has been on the international economic activities. There have been notable changes in the balance of trade and the international capital flows. During the financial crisis, the level of imports reduced at a faster rate compared to exports, this resulted in almost a surplus balance of payment.
However, with the crisis over, the imports for the United States have recovered significantly resulting in a high level of imports compared to exports. This has resulted in a deficit balance of payments. The capital flows are the financial side of international trade. Capital flows are the payments for goods and services that have been imported. Therefore, capital flows move in the opposite direction to the balance of payments. A country with a deficit balance of payment like the United States has a current account deficit or a capital account surplus. The American economy is experiencing negative capital flows currently.
The deficit balance of trade and the deficit capital flows is because the US economy is importing more goods and services than what it is exporting. This results in a negative net export value while the capital flows flow towards the trade partners of the US. Capital flows flow outwards since the net exports are negative, meaning the US has to pay its trade partners to settle the balance of trade. Therefore, there is a positive relationship between foreign trade and capital flows. The capital flows increase in an economy when the balance of trade is surplus.
A deficit balance of payment results in a negative capital flow. The balance of payment and the capital flows will also have a positive relationship with the economic activity. When the economic activity is vibrant, the country will produce more goods hence there will be more exports and less imports than when there is little economic activity.
The government through the Federal Reserve can use the monetary and fiscal policies to determine the kind of outcomes it wants in the economy. Monetary policies could be used to influence the value of the American dollar so that if the value appreciates, the imports will increase but exports will reduce. If currency depreciates, it will be possible to export more and import less because the exports will cheaper while imports will be expensive. The fiscal policy can be used to influence the balance of trade and capital flows by increasing or reducing taxes. Cutting down on taxes will increase purchasing power in the economy hence there will be more imports. Increasing taxes will discourage imports and encourage internal production hence reducing the deficit balance of trade and capital flows.
References
Jackson, J. K. (2011). U. S. Trade Deficit, the Dollar, and the Price of Oil. Darby: DIANE Publishing.
