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Macroeconomics Case Study

Case Title:

United States Trade Deficit: A Boon or A Bane?

Publication Year : 2010

Authors: S Ghosh, K Ray and A Syed

Industry: General Business


Case Code: MAC0031IRC

Teaching Note: Not Available

Structured Assignment: Not Available

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One of the most disturbing phenomena for the United States was its large trade deficit. The country heralded a prolonged period of rising trade deficit, which was the main cause behind the wide current account deficit. The widening trade deficit was ultimately rooted in the macroeconomic scenario of the country. The national savings rate of the country was exceptionally low compared to any other developed nation. As a result, the country had to borrow from foreign countries for domestic investments. Consumer demand was another fuelling factor behind the large deficit. Demand for goods in the United States always exceeded the domestic production which left no other option than importing at a huge level. The shift from a manufacturing based economy to a service-based one had also increased its dependence on foreign imports. A huge trade deficit was a cause of concern in the United States as it led to the increasing burden of foreign indebtedness. To narrow down the trade deficit, the country had to reduce imports. However, there was a great amount of debate about whether the country should opt for this trade-off. If the United States tried to diminish the trade deficit, she had to sacrifice its consumerism, the growth engine of the US economy. Thus, the trade deficit had contradictory impacts on the economy, which made it more difficult for the policy makers to decide whether to implement policies to trim down the trade deficit or let it be determined by market forces.

Pedagogical Objectives:

  • To the trade deficit scenario in the United States.
  • To the explicit and implicit reasons responsible for the huge trade deficit.
  • To the impact and future challenges posed by the increasing trade deficit.

Keywords :  Trade deficit, Savings rate, Merchandise trading activities, Free trade agreements, Tariffs and quotas, Largest service exporter, Trade surplus, Macro-economic scenario, Production-demand imbalance, Saving-investment imbalance, Capital-surplus, Federal budget, Corporate tax revenue, Current account deficit, Gross domestic product (GDP)

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