International trade is the trade that occurs between a country and its trade partners which are foreign countries. Countries practice international trade for various reasons such as to get foreign exchange, to get goods and services that are not found in the home country and so on. The United States of America carries out international trade with many countries worldwide. This involves exporting and importing goods and services to and from these countries. Foreign exchange rates are the rates at which the domestic currency, for example the American Dollar, is exchanged for other currencies of foreign countries.
In international trade, America imports a range of goods and services to other countries. Imports are the goods and services that the American government purchases from foreign countries that are its trade partners. On the other hand, exports are the goods and services that the American economy sells to foreign countries. Under normal circumstances, the value of imports should equal the value of exports for any given country. This condition will be referred to as a balance of payments. However, it is very hard for any country to attain the balance of payment in reality. If the exports exceed imports, the economy is said to be operating at a surplus. A surplus economy means that that economy is healthy and the productivity is very high in that country. If the imports exceed exports, the economy is said to be experiencing a deficit.
If the American economy experiences a surplus of imports, the economy will be said to be experiencing a deficit. A surplus of imports will imply that the American government is spending a huge chunk of it budget to purchase goods and services from abroad. The flow of payments will be outwards from the economy, the government will be giving away its currency to foreign countries in exchange for the imports. The country therefore, sees a deficit in its net exports while its trade partners gain the foreign reserves. The American economy will also be experiencing a downturn since a deficit implies that the economy is not operating optimally given its resources. The country’s foreign exchange reserves will be depleted since it has to purchase imports from other countries using the currencies of the trade partners. The deficit caused by the excess import may lead the economy into debt. This is because the government will have to find a way to finance the deficit. This could be by issuing bonds or by borrowing funds from abroad. Currently, the American government has a very huge debt, most of which is owed to its economic rival, China.
The United States of America has had an import surplus of oil over the past decade. It is only in 2011 that the US had a net export of oil. The import surplus of oil products has various effects on the American economy, the businesses and firms as well as the consumers in the country. With the surplus imports, the businesses and firms in the country are negatively affected. Oil is an essential item; therefore each firm’s cost of operation will go up because of the country’s resources being used to import oil. Most businesses use oil products. Since a lot of the oil is imported, the prices of oil will be higher than normal. This will mean the businesses have to raise the prices of their goods and services to accommodate for the extra burden of high costs of oil in the country. Consumers on the other hand will face the same problem. With oil being imported, its prices will be quite high. The consumers will have to pay more for every unit of oil. Other goods and services that are produced using oil will also be more expensive to cater for the high fuel costs.
International trade is important for any economy’s growth. Growth of an economy is determined by the increase in the Gross Domestic Product. International trade earns the country foreign reserves and increases the GDP of the economy. If the country has a surplus balance of trade, the GDP will increase. That is because from the goods that are exported, the nation earns foreign currency which adds up to the GDP. However, if the country experiences a deficit balance of trade, the GDP will reduce. This is because the country spends the revenue it has collected to purchase goods and services from abroad. If the economy has a balance of payments, its GDP is not affected by the international trade. That is because the amount spent on international trade equals the amount received from international trade, hence a net of zero gains or losses.
International trade also affects the domestic markets and consumers such as university students. A surplus of net exports in international trade will mean that the economy is booming. That will mean the domestic markets are operating optimally from the locally available resources. Therefore, international trade benefits the domestic markets further by injecting more revenue. The local firms and businesses will have the opportunity to sell their products abroad. However, if the economy is experiencing a deficit on the international market, the domestic markets will be negatively affected. However, this could be a blessing in disguise for the domestic markets because they will take up the burden of the role played by the international market. This will lead to a stable and all round domestic market that will be producing goods and services to meet the country’s needs. University students benefit from a surplus balance of trade. This is because the surplus earns the country foreign reserves and the economy becomes healthy. The students benefit from the job opportunities and cheaper goods and services compared to if the economy is in a deficit.
Tariffs and quotas are very important for international trade to protect the country’s domestic affairs and status. However, tariffs and quotas are likely to hinder optimal international trade for the country simply because the country wants to stabilize its domestic market. Tariffs and quotas will prevent the country from trading with some countries due to different reasons. The government choices on tariffs and quotas will determine who the country trades with and what kind of goods are traded and in what amounts.
Foreign exchange rates are the rates at which a unit of the domestic currency is exchanged for a given amount of a foreign currency. Foreign exchange rates are determined by the commercial banks and the Federal Reserve depending on the fiscal and monetary policies of the Federal Reserve and the demand and supply forces of the foreign exchange market. The Federal Reserve could decide to fix the foreign exchange rate to be permanent at a given value or let the forces of demand and supply determine the rates.
The U.S. could just decide to restrict all goods from it economic rivals such as China. However, this will not be wise. International trade with China is guided by the pacts and treaties signed by the two countries when the U.S. borrowed loans from China. The terms in the agreements are that the U.S. has to import goods from China during the period at which the loan is being serviced. Therefore, the U.S. cannot restrict goods from China. Similarly, the U.S. cannot minimize the amount of imports from the rest of the world because the amounts of imports for any country are determined by the demand for these goods. The imports are not set by Government, they are the necessities that the government has to purchase from abroad hence they must be purchased. This means that imports cannot be minimized by government or the Federal Reserve.
References
Gordon, R. J. (2008). Macroeconomics (11, illustrated ed.). New York: Pearson/Addison-Wesley.
Langdana, F. K. (2009). Macroeconomic Policy: Demystifying Monetary and Fiscal Policy (2, illustrated, reprint ed.). Munich: Springer.
Perry, G., Servén, L., & Suescún, R. (2008). Fiscal Policy, Stabilization, and Growth: Prudence Or Abstinence? (illustrated ed.). New York: World Bank Publication.
Robert, C. (2010). International Economics (13 ed.). London: Cengage Learning.
Trebilcock, M. J., & Howse, R. (2005). The Regulation of International Trade (3, illustrated, revised ed.). New York: Routledge.
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