Trade Deficits and the Purchasing Power

Abstract

Course name Instructor’s name Assignment due date Trade Deficits and the Purchasing Power The trade deficit of a country arises from the increase in the value of imports compared to the products and services a country exports to other markets. The United States’s balance of payments affects the purchasing power of the country’s currency and the exchange rates. Since the purchasing power of a currency is determined by the demand and supply in the global markets, it depends on the balance of payments (Gwartney et al., 2014). The purchasing power of the United States’s currency decreases when the value of imports is greater than the value of products and services the country exports. Consequently, it is necessary to worry about the trade deficit of the United States since it affects the country’s currency and economy. The trade deficit is bad since it affects the purchasing power of the U.S. dollar compared to other currencies such as the Yen or the Euro. An advantage of the trade deficit is that it indicates that some aspects of the economy are doing well and an increasing access to goods and services among the American consumers (Salvatore, 2020). Additionally, it can be offset by increasing capital investments in other countries to increase the inflow of the dollar. However, it is bad for the economy since it increases the supply of the currency and lowers its purchasing power. It is bad that the United States has a trade deficit since it shows that key sectors producing products and services for export are decreasing. With the decline of the purchasing power, the currency suffers in the global markets and this affects the American economy. References Gwartney, J. D., Stroup, R., Sobel, R. S., & Macpherson, D. A....