Trade Theory and Factor Mobility

Is an international trade deficit, or a current account deficit of the BOP, necessarily a bad thing? When can it be problematic? Do you see any signs of problem for the U.S. in the materials provided in this module?

There is no clear-cut answer as to whether or not an international trade deficit (or a current account deficit) is good. Particularly today, in a time of high inflation, economists believe a deficit is good. The transverse is true during deflation. A benefit of the deficit domestically is that we are bringing in more tangible resources from abroad for investment within our economy. This debt can inspire the creation of more jobs, more income, and the production of more goods and services. However, another consideration that could pose a problem for the U.S. is the longevity of the deficit. The longer a trade deficit exists, the greater the extent foreign nations will have financial claims on the U.S.- including U.S.-based assets, firms, land, and buildings.

What are the U.S. foreign affiliated sales discussed in the 2nd CNBC video? How can it be considered as a substitute effect of U.S. exports of goods and services, according to factor mobility theory?

This CNBC piece was fascinating, as I was unaware that this data was omitted when calculating the U.S. trade deficit. U.S. foreign affiliated sales are sales by U.S. companies on foreign soil. This scenario includes companies like Starbucks, Mcdonalds, and General Motors, which all have an international presence (revenues) in other countries. The sum of these revenues would almost wipe out our entire U.S. trade deficit. The CNBC journalist was suggesting that our deficit is not truly as large as it seems because we are excluding this one significant financial variable from the equation. This situation is a great example of the substitution effect within factor mobility theory. Moving U.S. businesses overseas will reduce the trade volume of that business industry within the U.S.- reducing the trade volume imported from the U.S.