International Trade

International trade is the exchange of goods and services with other countries. It can represent a substantial share of the GDP for the US. Greater international trade helps the US economy as long as trade balances are kept down. Two tools the government can use to help manage the economy are fiscal policy and monetary policy. The fiscal policy is changes in government spending, borrowing, or taxes to either speed up or slow down the economy. The monetary policy is the Fed's control over the money supply. The exchange rate determines how much the US dollar is worth, which in turn affects the amount of imports and exports. Protectionism is a policy limiting trade between nations.

Balance of trade is defined as the difference between the monetary value of exports and imports over a period of time. A trade surplus happens when you export more than you import and a trade deficit happens when you import more than you export. Since the 1970's the US has had a trade deficit. As of November 06, 2006, the US had a deficit of 70.1 billion for September, this down from 74.9 billion in August. The US had a surplus of services, 5.8 billion in September which is down from 5.9 billion in August. Patterns indicate that the deficit increases faster during economic expansion and increases slower during economic contractions. This deficit can be blamed on several factors which include: continued economic growth in the US, rising oil prices, continued increase of imported products, continued demand for US investment asset, and continued dependency on foreign countries for food, raw materials, and natural resources. Some people believe that a trade deficit is not good for the country's economy. During a recession, countries usually export more which creates more jobs and increases demand. During an expansion, countries usually import more which creates price competition and keeps inflation down. Therefore, a trade deficit would be good for the economy during an expansion, but not during a recession. Currently the US is in an expansion which means in theory more imports will help to keep inflation down. Our trade deficit is at the highest it has ever been. The US needs to work on getting the trade deficit down some without hurting the economy. If the trade deficit keeps rising, then the US dollar will eventually fall against other currencies. Before the US expands international trading, the trade deficit needs to be reduced first. Limiting the number of goods and services that are imported could mean that Americans pay more for some things. It also means that some jobs here in the US are not lost to foreign countries. Expanding the Central American Free Trade Agreement (CAFTA) could possible hurt more than help. With the trade deficit as high as it is now, the US needs to concentrate on lowering that deficit instead of increasing it.

Fiscal policy is defined as the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. The government uses fiscal policy as a way to control the level of aggregate demand in the economy to achieve economic objectives of full employment, economic growth, and price stability. There are two ways the government can fund these expenditures. One way is by taxation. Taxation includes personal and corporate income. If the government cuts taxes then Americans income rises and they will be able to spend more on goods and services. This will raise the aggregate demand. The government can also keep taxes the same and increase purchases this will directly increase demand. During a recession, the government tends to issue a tax cut, which in turn increases the spending habits of Americans. During an expansion or boom, the government tends to increases taxes to keep inflation down. When the government does issue a tax cut, this can increase the amount of the Federal deficit. This can increase interest rates, which in turn decreases spending. The second way is by borrowing. When the government does not have the money to provide the goods and services to its people, they can borrow from capital markets. Usually this is done through Treasury Bills or Treasury Bonds. Fiscal policy affects the trade balance and exchange rate. When interest rates rise due to the government borrowing this will attract foreign capital. Foreign investors will try to make the price of the dollar higher causing the exchange rate to go up. When the exchange rate is higher, imported goods are cheaper in the US and exported goods are more expensive in foreign countries. This will lead to a decrease in the trade balance.

Monetary policy is defined as the government or central bank process of managing money supply to achieve specific goals like maintaining an exchange rate, achieving full employment or economic growth, and limiting inflation. The goals of the US monetary policy are to promote constant prices and to promote the highest sustainable output and employment. One way the US achieves these goals is by raising or lowering the interest rate. Lower real interest rates in the US tend to reduce the foreign exchange value of the dollar. This in turn lowers the prices of goods produced by the US that we sell to foreign countries and raises the prices on the goods we buy from foreign countries. This increase raises production and employment and also increases what businesses spend on capital goods. Monetary policy's primary tool is open market operations. Open market operations are purchases and sales of U.S. Treasury and federal agency securities. Monetary policy has several tools the government can use. One of those tools