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Economics Portfolio on Trade Deficits

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Introduction

Trade deficit blows out as exports drop May 4, 2007 - 1:34PM The trade deficit blew out in March as resource infrastructure bottlenecks cut the country's export earnings. The balance on goods and services widened to a seasonally adjusted deficit of $1.622 billion in March, from a downwardly revised $728 million in February, figures from the Australian Bureau of Statistics (ABS) showed. Exports dropped four per cent in adjusted terms, while imports rose one per cent. UBS economist George Tharenou said the large fall in exports was the biggest contributor to the trade deficit blow-out. "The data reveals a worse export performance heavily impacted by likely temporary resource infrastructure bottlenecks and delays, after a moderate improvement over the prior two months," he said. "The decrease in exports largely reflected lower metals ores, gold and other mineral fuels, with cereals also down again. "Offsetting these falls to some extent were solid rises in machinery and other manufactures." Mr Tharenou said import growth was slightly softer in the month, but would likely pick up again due to the stronger Australian dollar. ...read more.

Middle

of the aggregate demand curve (graph to left). Therefore, a trade deficit slows down the economy. In Australia, "resource infrastructure bottlenecks cut the country's export earnings". A bottleneck is a point at which an industry or economic system has to slow its growth because one or more of its components cannot keep up with demand. This means that there is not enough excess supply potential in the economy in order to export goods. Production shutdowns and delays are slowing down the exports, and once production is up and running then there should be more exports and a more favourable balance of trade. However, economist Helen Kevans disagrees, saying the firmer Australian dollar was the reason for the reduction in exports. "Exports dropped four percent in adjusted terms while imports rose one percent." The Australian dollar has recently become stronger; perhaps the stronger Australian dollar is encouraging people to import more. In addition, the economist suggests that the strong Australian dollar is undermining the competitiveness of its exports because it is now more difficult for other countries to import Australian goods. ...read more.

Conclusion

The industries that do not manage to export enough goods (metal ores, gold, mineral fuels, and cereals) will have a decrease in production, supply, then finally, employment. Therefore, if this negative balance of trade persists in Australia, then the level of unemployment will increase. However, people believe that sometimes the trade deficits will not affect the country, this is because free markets will correct a country's trade deficit, as floating currency rates rise or fall with time to encourage or discourage imports in favour of the exports, reversing again in favour of imports as the currency gains strength. In addition, a country with a trade deficit signals that its currency is strong and desirable. A trade deficit then simply means that consumers have the opportunity to purchase and enjoy more goods at lower prices. A trade deficit demonstrates that the country is promoting trade, it can consume outside its production possibility frontier, improve its citizens' living standards, and expands the world's production possibility frontier, but is all this worth the risk of a currency crisis? ...read more.

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The analysis in the second part of this essay is a good attempt but the writer is not in full command of the theory. The question of whether a trade deficit is always a bad thing is very complex and the writer does not attempt to deal with it.

Marked by teacher Dennis Salter 04/10/2013

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