Balance Of Goods And Services Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The balance of goods and services, also known as the trade balance, is part of the Current Account (CA) balance in a nation’s Balance of Payments (BoP) statistics. This net measure of a country’s position with respect to trade in goods and services is a widely cited statistic in the context of the current U.S. trade deficit and implications for its sustainability in future years.

A country’s balance of trade in goods records the difference between exports and imports of merchandise and is therefore also referred to as the merchandise balance. As a category, merchandise (or goods) includes physical items such as cars, steel, food, furniture, clothes, appliances, etc. Merchandise exports record the transfer of ownership, between a country’s residents and nonresidents, of all tangible goods (including nonmonetary gold). However, some goods are excluded in this category, such as merchandise purchased by a country’s residents abroad and purchases of goods by diplomatic and military personnel. The latter are separately classified under travel transactions in the balance of services.

The standard practice in determining the value of merchandise exports is to include the value of the goods themselves, and the value of outside packaging, and related distributive services used up to and including loading the goods onto the carrier at the customs frontier of the exporting country. This is commonly known as the free on board (f.o.b.) value. The value of all exported goods appears as a credit in a country’s CA since payments from foreigners are received in exchange for the exported merchandise. Similarly, imports of merchandise appear as a debit in the CA since they reflect exchanges of movable goods between residents and nonresidents (also valued f.o.b. at the customs frontier of the country that is exporting them). Thus, the merchandise balance is a net measure of merchandise trade which can be either positive (a surplus of exports receipts over import expenditures) or negative (a deficit showing import expenditures exceeding receipts from exports).

Similarly, the difference between exports and imports of services is known as the balance on services. Trade in services includes exports and imports of transportation services (such as shipment and passenger services), insurance services, travel services (such as hotel and restaurant services), legal services, consulting, etc. Other transactions in the services category include items not separately classified as merchandise, or non-factor services, or transfers. Examples include transactions with nonresidents by government agencies and their personnel abroad and transactions by private residents with foreign governments and government personnel stationed in the reporting country. The balance on trade in services is therefore also a net measure which can be either positive (a surplus of services exports over imports) or negative (a deficit indicating that services imports outweigh exports).

Taken together, the balance on merchandise (goods) and services trade comprise the balance of trade which is itself a net trade measure of a country’s trade position. A trade deficit implies that a nation is importing more goods and services than it is exporting. A surplus would indicate that exports of goods and services outweigh imports.

Historically, the United States has experienced both trade surpluses and trade deficits. A long (and almost unbroken) string of trade surpluses prior to, and following, World War II coincided with strong support by the United States for the elimination of barriers to trade and investment. Starting in the 1970s, however, trade deficits not only became the norm but grew quite large in the 1980s and 1990s. Since trade deficits are by definition an excess of imports over exports, such imbalances are often seen as an international trade problem that may be alleviated through trade policy initiatives. For example, opponents to freer trade may point to a burgeoning trade deficit as evidence of declining competitiveness and consequently argue in favor of trade restrictions and protectionist measures. At the same time, economic theory shows that imbalances between savings and investment (both domestic, and in relation to the rest of the world) are the more likely long-term cause of trade deficits and trade policy initiatives are unlikely to eliminate the latter.

Statistics from the Bureau of Economic Analysis show record trade deficits in the United States since 2000. The deficit on goods and services stood at an unprecedented $758.5 billion in 2006 and decreased modestly to $708.5 billion in 2007. By comparison, the trade deficit in 1995 was $96.3 billion. This escalation of the U.S. trade deficit over the past decade has intensified the public debate surrounding sustainability of trade imbalances. Arguably, trade deficits of the late 1990s were relatively benign, since they were viewed as a means to finance higher U.S. investment rates. On the other hand, recent trade deficits are generating new concerns. Unlike their 1990s counterparts, they are seen as representative of high consumption and large government deficits (corresponding to increases in U.S. government budget deficits).

The relationship between government budget deficit and trade deficits (also known as the twin deficits), can be established through a National Income accounting identity, which states that the difference between the two is equal to the difference between private saving and investment. From a policy perspective, therefore, a sizable reduction in the U.S. budget deficit is a credible policy recommendation in view of current trends. In addition, policy initiatives need to promote expansion of market demand in major economies outside the United States, and a gradual and substantial realignment of the U.S. dollar with the currencies of other major trading partners. Global adjustment to U.S. trade imbalances could, alternatively, occur through financial markets. However, the latter may have grave implications for the value of the dollar, and consequently, the health of the world economy and the global trading system.

Bibliography:

R. Krugman and M. Obstfeld, International Economics: Theory and Policy (Pearson/Addison-Wesley, 2006);
Obstfeld and K. S. Rogoff, Foundations of International Macroeconomics (MIT Press, 1996);
S. Bureau of Economic Analysis, www.bea.gov (cited March 2009).

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