Trade Deficit

Introduction

The trade deficit is a negative balance showing a deficiency in the amount of exports compared to imports during a given period. The trade deficit is in terms of cash flow output of the domestic currency for foreign currency attached to various foreign markets. There is talk of trade deficit when the value of imports exceeds that of sales (lost sales). When a country has a huge trade deficit is expected that in the long term its currency to depreciate. This system was in force until 1971 when the U.S. decided to end this system to the U.S. dollar because the U.S. this year recorded its first trade deficit of the twentieth century (Krugman, 11). When it comes to deficit spoken of excess spending on government revenues, when it comes to trade deficit of balance of payments is related to the excess of imports over exports.

The negative trade balance of U.S. in May 2012 decreased as compared with a revised value for the previous month and amounted to $ 48.7 billion. In this paper we are going to analyze approaches to promote long-run Macroeconomic stability along with the impact of persistent budget deficit on trade deficit. Then this paper will analyze option available to policymakers to improve trade deficit. These analyses could be carried by appraising position of supply side economists and evaluating national economic policies. Finally in the end effect of protectionist policies on trade deficit will be analyzed.

Approaches to promote macroeconomic stability

In order to ensure macroeconomic stability it is appropriate to build on the base, the average oil price for the five-year period, with annual accounting period of one year until 10 years. Marginal costs of the federal budget should not exceed the amount of income at a base price of more than one percent of gross domestic product. State tax policy should be directed to the improvement, including the quality of the investment climate, increase its competitiveness, especially in the markets of high technology and high-tech products. The procedures of tax administration should be as comfortable for honest taxpayers. According to monetary theorists and Keynesian theorists Macroeconomic policy can also be promoted by fiscal policy by sustaining private sector incomes and aggregate demand during economic downturn (Elwell, 45).

On the other hand during periods of strong time moderating economic activity can be a good approach. the Monterrey Consensus by exploring innovative ways mobilize financing for private and public investment and strengthen debt management, considering financial instruments such as growth-indexed bonds and others to promote macroeconomic stability and reduce financial vulnerability. Monetary theorists say that monetary policy is the best contributor to macroeconomic stability because it anchors inflation expectation at certain level which is constant with price stability. The best framework to improve macroeconomic stability can be achieved through medium oriented monetary policy. Medium long term orientation should also be adopted by Fiscal policies and it should also rely on automatic stabilizers on short term. In particular situation flexible approaches can be appropriate when countries face recession ...