Balance of Payments Explain Briefly Term Paper

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S. economy coupled with slower growth rates in key U.S. trade partners, and not a sign of poor economic health.

Was this an attempt of the administration to put a happy face on bad economic news? Quite simply, U.S. consumers, said the Bush Administration, had more dollars to spend on imported goods, hence the increased gap -- the gap in the short run was a sign of health, said the administration. "We have an economy that is growing faster than most around the world and that can increase the trade deficit," said White House spokesman Scott McClellan. The Commerce Department said the U.S. trade gap widened in October to a record $55.45 billion. (AP Wire, 2004)

Outside analysts also looked to the higher cost of crude oil and petroleum products played a key role in the October figures, putting a not-so happy face on the balance of payments deficit in capital assets in the form of merchandise dollars, one of the key elements of the balance of payments. (Ruby, 1999) the October record deficit broke a record for the United States balance of trade simultaneously as oil prices posted their biggest climb in fourteen years. Demand grew sharply for foreign-made consumer goods in the U.S. true, but the nation as a result bought $17.69 billion of energy-related petroleum products from international sources. At the same time the average price of a barrel of crude jumped to a record $41.79 from $37.62; the $4.17-month-to-month jump was the highest since a $4.45 rise in October 1990.

Thus, oil prices played a key role in the current balance of payment statistics, as well as administration financial policy regarding deficits and spending. The U.S. posted a record $7.2 billion deficit with the members of the Organization of Petroleum Exporting Countries, Commerce said. Also a record was the $9.46 billion in imports from OPEC countries. (AP Wire, 2004)

The Bush administration said the solution to the U.S.'s chronic deficit in the long run was to boost exports and to negotiate new trade agreements as well as enforce existing trade agreements. The administration agreed it should reduce deficits, and it cautioned protectionism was not the answer to rectifying the balance of payments, as "the most important thing for us to do is to continue to expand trade around the world and open markets to American products and producers and to make sure they have a level playing field on which to compete," McClellan said. (AP Wire, 2004)

But the burgeoning United States deficit looms large. Deficits cause concern for international investors, and deficits represent credit owed to lenders, including other nations, which results in record out payments and sways the balance of payment against the United States' favor. The war in Iraq's likely continuation, George Bush's social security overhaul, and the Bush administrations proposed tax cuts all means that in the short run, such deficits are likely to hamper the United States' current rectification of its balance of payments.

Fears remain that the United States, as the force of world opinion turns away, will become a less attractive investment prospect, and that the dollar will continue to weaken as current consumers in the nation remain addicted to cheaper imported goods, all the while decrying outsourcing of jobs with their every breath. Meanwhile, although the U.S. deficit in international trade of goods and services swelled 8.9% from a revised shortfall of $50.93 billion in September, no clear solution has presented itself to the wealth of political and economic problems that cause such debts. Moreover, such a sustained reliance on imports will certainly act as a drag on domestic growth and they may also increase competitive pressures on domestic producers, while an increase in exports could boost domestic production, but exports rose 0.6% to $98.06 billion in October. (AP Wire, 2004)

Works Cited

AP Wire Website. (2004) "U.S. Trade Gap Widens as Production Rises." October 2004.. Retrieved 17 Dec 2004 at

Balls, a. (19-20 June 2004) "U.S. current account deficit £1.5bn a day." Financial Times.

Ruby, P. (1999) "Balance of Payments." Digital Economis website last updated 2003. Retrieved 17 Dec 2004 at

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Hughes, J. (15 September 2004)"Widening deficit reveals U.S. reliance on foreign cash." Financial Times.

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