Trade Balances in Historical and International Context
Learning Objectives
By the end of this section, you will be able to:
- Analyze graphs of the current account balance and the merchandise trade balance
- Identify patterns in U.S. trade surpluses and deficits
- Compare the U.S. trade surpluses and deficits to other countries’ trade surpluses and deficits
We present the history of the U.S. current account balance in recent decades in several different ways. Figure 1 (a) shows the current account balance and the merchandise trade balance in dollar terms. Figure 2 (b) shows the current account balance and merchandise account balance yet again, this time as a share of the GDP for that year. By dividing the trade deficit in each year by GDP in that year, Figure 1 (b) factors out both inflation and growth in the real economy.
![The first graph shows the current account and merchandise trade balance in nominal dollars. Both lines dropped drastically between 1995 and 2005. In 2013, the current account balance is −422.2, and the merchandise trade balance is −702.284. The second graph shows the current account and merchandise trade balance as percentages of GDP. Both dropped around 1986, but increased gradually until 1991, when both dropped again with the low around 2005. As of 2013, both current account and merchandise credit are around –2% and –4% of the GDP respectively.]](https://s3-us-west-2.amazonaws.com/courses-images/wp-content/uploads/sites/3165/2018/04/05011412/CNX_Econ2e_C23_02.jpg)
By either measure, the U.S. balance of trade pattern is clear. From the 1960s into the 1970s, the U.S. economy had mostly small trade surpluses—that is, the graphs in Figure 1 show positive numbers. However, starting in the 1980s, the trade deficit increased rapidly, and after a tiny surplus in 1991, the current account trade deficit became even larger in the late 1990s and into the mid-2000s. However, the trade deficit declined in 2009 after the recession had taken hold, then rebounded partially in 2010 and has remained stable up through 2016.
Table 1 shows the U.S. trade picture in 2015 compared with some other economies from around the world. While the U.S. economy has consistently run trade deficits in recent years, Japan and many European nations, among them France and Germany, have consistently run trade surpluses. Some of the other countries listed include Brazil, the largest economy in Latin America; Nigeria, along with South Africa competing to be the largest economy in Africa; and China, India, and Korea. The first column offers one measure of an economy’s globalization: exports of goods and services as a percentage of GDP. The second column shows the trade balance. Usually, most countries have trade surpluses or deficits that are less than 5% of GDP. As you can see, the U.S. current account balance is –2.6% of GDP, while Germany’s is 8.4% of GDP.
| Exports of Goods and Services | Current Account Balance | |
|---|---|---|
| United States | 17.6% | –2.6% |
| Japan | 16.2% | 3.1% |
| Germany | 46.8% | 8.4% |
| United Kingdom | 27.2% | –5.4% |
| Canada | 31.5% | –3.2% |
| Sweden | 45.6% | 5.2% |
| Korea | 45.9% | 7.7% |
| Mexico | 35.4% | –2.9% |
| Brazil | 13.0% | –3.3% |
| China | 22.1% | 3.0% |
| India | 19.9% | –1.1% |
| Nigeria | 10.7% | -3.3% |
| World | – | 0.0% |
Summary
The United States developed large trade surpluses in the early 1980s, swung back to a tiny trade surplus in 1991, and then had even larger trade deficits in the late 1990s and early 2000s. As we will see below, a trade deficit necessarily means a net inflow of financial capital from abroad, while a trade surplus necessarily means a net outflow of financial capital from an economy to other countries.
Glossary
- exports of goods and services as a percentage of GDP
- the dollar value of exports divided by the dollar value of a country’s GDP
the dollar value of exports divided by the dollar value of a country’s GDP
