Question

What does it mean when it is said the U.S. is running a trade deficit? What impact do you think a trade deficit could have on interest rates?

Answer 1

In simple terms trade defecits can be defined as imports minus exports for a country. It signifies an outflow of domestic currency in foreign markets. It is also said to as a negative balance of trade (BOT). U.S has historically imported more than it exported in the recent past with the difference rising each year barring few exceptions. In 2017. imports were $2.895 trillion and exports were only $2.329 trillion. The deficit in goods and services was hence $566 billion in 2017.

A constant trade defecit can have detremental effects on the economy of the country. It has adverse effect on the interest rates. More exports lead to devaluation of the currency of the country. Depreciation of currency leads to increase in inflatin. This may lead to the central bank (Federal reserve) decreasing the rates to curb inflation.