Trade Balance the Concept of Research Paper

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Earlier studies based on Bretton Woods data were only refuted because the data sets of the later studies were insufficiently long. It may be, therefore, that Himarios is one of many that will now be able to demonstrate that long-term equilibrium is possible. It may that it requires nearly at least three decades' worth of data and a multi-country study in order to see the equilibrium emerge, meaning that previous theories were simply not taking into consideration the time frames that would be required for production, wage and policy shifts to be implemented and have their impact on a nation's balance of trade.

Himarios' findings do suggest that externalities cannot be maintained. While a single government can maintain consistent economic policy for decades seemingly regardless of the consequences (Cuba or North Korea, for example) a free economy cannot. Eventually a trade deficit will result in a workforce demanding jobs, for example, leading government to reduce trade barriers or lower the value of its currency. A persistent surplus will result in an overheated economy. China is not yet priced into the stratosphere, but it is becoming priced out of reach of many Chinese. Such a situation can be predicted to eventually lead to civic unrest, which would again spur the removal of externalities. The argument to be made, then, is not whether externalities can be maintained forever -- they cannot -- but for how long they can be maintained. The answer to this question, given the examples post-World War Two, appears to be in the decades. The longer the externalities are sustained against the forces of basic economies, the bigger will be the collapse.


For many years, economists had found that trade balance equilibrium was not achieved through exchange rate fluctuations alone. This hinted that if such equilibrium were probable, it would come about only as the result of a confluence of multiple factors. The externalities that cause the disequilibrium in the trade balance will eventually need to be unwound. While for years, evidence of long-term equilibrium under free currency floats could not be validated, in recent years evidence has begun to emerge supporting the idea of trade balance equilibrium. This is not unreasonable, considering the types of externalities that need to be adjusted in order to bring about a state of equilibrium. Exchanges rates are just one -- consumer spending patterns, wages, trade policy and other factors all impact the balance of trade. The process of adjusting all of these requires a much longer frame of time than had perhaps been originally believed. More evidence should arrive in the coming years in support of long-term trade equilibrium -- it will be interesting to see if this materializes because it appears that only know are we able to gather sufficient information since the advent of free floating currencies regarding trade equilibrium.

Works Cited:

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Himiaros, D. (2007). Do devaluations improve the trade balance? The evidence revisited. Economic Inquiry. Vol. 27 (1) 143-168.

Krugman, P. & Baldwin, R. (1987). The persistence of the U.S. trade deficit. Brookings Papers on Economic Activity. 1: 1987.

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