Trade deficit and its effects on the United States Economy

According to the Federal Reserve Bank of St. Louis, ,the United States currently has a trade deficit of approximately $500,000,000. Many in the United States believe that balancing the budget and reducing this figure to zero would help increase the Gross Domestic Product (GDP) and  stimulate employment. However, reducing this number may not help the United States economy grow due to its link to other factors. The GDP, according to The Upshot’s Gregory Mankiw is, “the sum of consumption spending, investment spending, government purchases and the net exports of goods and services.” He also  argues that, everything else constant, a decrease in net exports would positively affect the economy.

However, the overall picture is more complex and systematic. In the current system, the money spent on goods overseas has a feedback effect on our economy.  Foreigners may increase consumption of US exports, consequently increasing our trade balance and stimulating economic growth. They may also invest in domestic stocks, bonds, and boost foreign direct investment in plants on United States soil. As the FED of St. Louis shows, the United States deficit in foreign investment increased from 2.5 trillion in 2010 to over 8 trillion in 2016, meaning that foreign companies are investing their money in US industries. As Mankiw states, this strengthens the dollar causing the exchange rate to appreciate and prices of US exports to rise in relative to foreign exports. This will negatively affect the US trade balance and increase the current deficit as foreigners buy fewer US exports. When looking at the graphs that represent foreign investment and the dollar appreciation over the same period of time, you can see that as investment from foreign companies increased so did the strength of the dollar.

According to Mankiw, in 2009, when America had a large trade deficit, unemployment was around 10 percent. However, during 2006, when the deficit was much higher, unemployment was 4.4 percent. Therefore, it stands to reason that a deficit may not be so bad after all, at least according to one macro-economist.


Tyler Aman

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