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21-4 International Trade [CH 21

Figure 21.1 US Trade Deficit

Americans purchased more goods from these countries than US
companies sold to these countries. Buying more and selling less
is a trade deficit in the international market.

Balance of Payments

Balance of Payments A nation's balance of trade plays a central role in determining its balance of
A country’s balance of trade payments—the overall flow of money into or out of a country. The greatest
refers to the difference in how importance of balance of payments lies in its serving as an indicator of changing
much a country is importing international economic position of a country. The balance of payments is the
versus exporting. The three
components of the balance of economic barometer which can be used to appraise a nation's short-term international
payments are the current economic prospects, to evaluate the degree of its international solvency, and to
account, financial account, determine the appropriateness of the exchange rate of country's currency. Other
and capital account. factors affecting the balance of payments are overseas loans and borrowing,

international investment and the remittance of profits from such investments, and
foreign aid.
A favorable balance of payments, or balance of payments surplus, means a net
inflow of money from abroad. An unfavorable balance of payments, or a balance of

payments deficit means a net outflow of money from the country (Figure 21.1). The
effect of the other components on a country's balance of payments can offset or
intensify the deficit or surplus resulting from its balance of trade.
Nations with a balance of payments deficit normally try to solve this problem by

some combination of reducing their dependence on foreign goods, reducing
investments abroad, devaluing their currency, and increasing their exports. Often this
requires politically unpopular moves that slow economic activity and the demand for
foreign goods and produce increased unemployment and/or higher prices as a result.
exchange rate
Rate at which a country's
currency can be exchanged The Exchange Rate
for other currencies or gold. The value of a nation's currency in relation to that of other nations currencies
value or to a fixed standard such as gold and silver, which are precious metals, is
Fiat: printing currency that is called its exchange rate. The exchange rate is a reflection of the nation’s inflating its
not backed by precious
metals such as gold or silver. currency and the market reacting to that inflationary fiat inflation. A currency's
exchange rate is usually quoted in terms of other important currencies. For example,
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