To what extent does currency devaluation successfully eliminate a balance of payments (trade) deficit?
Normally the answer is yes. But it depends on the elasticity of your imports and exports. Elasticity refers to the substitution of one good in the place of another.Devaluation of your currency makes imports more expensive and your exports cheaper. If you can produce and substitute domestically-produced goods and services in the place of imports (which is where elasticity comes in), then you will import less. Concurrently, if your exports can substitute for similar goods and services on the world market, then your exports increase.A country with no oil has no elasticity in its oil imports. Similarly, Costa Rica (as an example) does not produce cell phones, so it has no elasticity in cell phone imports. But most products are elastic; domestic markets can substitute domestic goods and services for most imports.A decrease in imports and/or an increase in exports will reduce your current account deficit.
How sustainable is the US government's persistent deficit spending in the long term?
The U.S. is in far deeper debt than most Americans realize. The official national debt is about 20 trillion dollars, but that does not include trillions for the Social Security System and trillions for Medicare. Add to that trillions of unfunded pensions for civilian and military federal workers.Then add the debts of the states, counties, cities, and special districts. No one knows exactly how much government debt exists in the U.S., but experts estimate between 90 to 100 trillion dollars! That is about $300,000 per capita.In addition to that, the U.S. has run up a cumulative current account deficit from decades of trade deficits, which is nearly 9 trillion dollars, owned largely by China, Japan, Saudi Arabia, etc.We have mountains of debt. We are able to service our debt right now in part because interest rates are so low, but there is no guarantee interest rates will remain low. I bought my first home back in 1980 when inflation was high; my mortgage interest rate was 11%. That is unlikely any time soon, but there is no guarantee those conditions won’t return.
How do countries overcome trade deficit?
The trade deficit occurs when the value of imports is greater than the value of exports. This could reflect a lack of competitiveness or high levels of consumer spending on imports.Reducing the value of the exchange rate can help to reduce a trade deficit. When the value of the Pound falls it makes UK exports more competitive, increasing quantity demanded. A depreciation also makes imports more expensive, reducing demand for imports and foreign holidays. Therefore, we would expect a depreciation to improve the trade deficit.However, it is not that simple. It depends upon the elasticity of demand.If demand for exports is very inelastic. A fall in price (10%) may lead to only a small fall in demand (1%). Therefore, the value of exports will decrease because the lower price decreases revenue.However, if demand for exports is elastic. then a fall in price will lead to a bigger % increase in demand. Therefore, there will be an increase in export revenue.The Marshall-Lerner condition states that a depreciation in the exchange rate will improve the current account deficit IF PED x + PED M >1The effect of a depreciation also depends on other things.Inflation? If a depreciation causes inflation, then exports may not become more competitive. Therefore, demand will not increaseGlobal Recession. If the global economy is in recession, demand for exports will fall, even if the Pound depreciates. Alternatively, if UK is in a boom our demand for imports will keep rising.Quotas to Reduce Trade DeficitImport quotas may reduce value of imports. But, the key question is whether other countries retaliate by placing import quotas on UK exports.Other Policies to Reduce a Trade Deficit.Supply Side Policies – these policies aim to improve the productivity and competitiveness of the economy – making UK exports more competitive and attractive. This helps increase exports.Deflationary fiscal policy. This involves higher tax and lower government spending. Higher tax reduces consumers’ disposable income leading to a decline in consumer spending and less spending on imports. Also, the deflationary fiscal policy helps reduce inflation and thereby improve the competitiveness of exports.Note: deflationary monetary policy could be used. However, higher interest rates would cause an appreciation in the exchange rate and worsen the trade deficit.Source :Reducing a Trade Deficit
How has a budget deficit hurt America?
Our annual trade deficit has ballooned to $726 billion and our federal budget deficit in fiscal 2006 is $423 billion -- an alarming 3.2 percent of gross domestic product, or national economic output. Workers' wages have been stagnant for 20 years and now they are actually declining. Employer-provided health care is shrinking and 46 million people -- most of them from working families -- have no health care coverage. Our nation is headed in the wrong direction, and now is the time to take steps to turn it around. Instead of giving more tax breaks to the wealthy and allowing multinational corporations to ship our best jobs offshore, we have to repeal the Bush tax cuts and insist that Congress repeal federal tax laws that reward corporations that send jobs offshore!$6.592 trillion: Federal debt on June 26, 2003, the day Josh Bolten became director of the Office of Management and Budget. $8.364 trillion: Federal debt today. In the Bush administration, this is grounds for a promotion. On January 26, 2006, Bush said in one of his carefully crafted press conferences, "Our economy is growing, it is strong. This economy has created millions of new jobs, yet it's an economy that is changing rapidly." The jobs being created are a result of unconstitutional looting of the people's treasury by Congress for votes. These are government jobs which lure the people into more and more dependency upon mother government. With our major job sectors destroyed because of NAFTA and GATT, Americans are desperate for any sort of decent paying jobs. It will get worse now that Congress and Bush sold us out again with CAFTA. Sadly, Americans are taking jobs with the Nazi, draconian and worthless Department of Homeland Security. Once those pay checks start rolling in, they will not bite the hand that feeds them. This is how slaves are made. The late, great American, Ezra Taft Benson, wrote in his work, An Enemy Hath Done This, that America will be destroyed from within by Americans. His prediction so many decades ago is materializing right before our eyes.