Globalization on Trade Imbalances Globalization

¶ … Globalization on Trade Imbalances Globalization Trade deficit is when the imports of a given country exceed the exports. It is caused by dependency of foreign commodities to satisfy the needs of the citizens other than producing these products and services locally. A growing economy should have a positive trade balance. Trade balance is the difference between import and exports. When there is a positive balance of trade an economy enjoys trade surplus, but when an economy import more than it exports, the trade balance is negative resulting to trade deficit.

A country with trade deficit should work towards improving this so as to become competitive and reduce overreliance on imports. When a country have a deficit trade balance, it growth declines thus affecting the lives of the citizens. United States has experienced trade deficit for some times though the balances vary from time to time. This affects the dollar making fluctuate from time to time. This affects the foreign exchange resulting to either the fall or raise.

When the foreign exchange rises, it means that the foreigner will buy less and the country will import more resulting to trade deficit. When the foreign exchange falls it means that the foreigner will buy more form the country and the country will import much with little currency thus improving on trade balance. When the dollar declines it means that the foreigner can buy more with the same amount by the country can purchase less thus resulting to an imbalance in trade.

This is what has been happening in the last years thus United States has been having a deficit in balance of trade (World Economic Forum, 2010). The main contributor to these trade deficits is the great global depression. The deficit slows the economic recovery and jobs creation. It also limits the efforts of the president and the congress to cut it without affecting the economy recovery. Rising oil prices and imports from China increases trade deficit in United States.

Many Americans are purchasing new cars increasing the amount sent on purchase of oil from Middle East countries. They also purchase a lot of consumer goods from China, but these countries do not import from them. Resultantly, the government's position to create enough jobs for the citizens has been compromised. The U.S. dollar has been having a downward trend depreciating from 2002. This is has raised concerns among the citizens since it is an indication of broader economic problems.

There are changes of weak economic recovery, rising public debts, and a diminishing stand in the global economy. Depreciation of dollar affect economic performance such as decreased international purchasing power, net exports, rising commodity rice, and an upward pressure on interest rates. The global market determines the dollar exchange rate. The dollar path can be influenced by numerous factors that have a possibility of conferring to the United States benefits and costs.

The exchange rate of dollar has been influenced by the market forces of it demand and supply in the global foreign exchange market. It is demanded by the foreigners to buy dollar dominated goods and assets. It is supplied to the foreign exchange market by Americans exchanging for foreign currencies needed to buy foreign goods and assets. There has been a trade deficit in United States in goods transaction.

This generates a net increase in the supply of dollar on the foreign exchange market exerting a downward pressure on its exchange rate. There are suggestions from standard economic analysis that sustained depreciation of the dollar will have both negative and positive effects on the United States economy. The exchange rate determines the rice of domestic and foreign goods. It can influence the value and volume of exports and imports thus influencing the balance of trade. The depreciating dollar improves the price competitiveness of U.S.

exports in the foreign market thus reducing the deficit in the balance of trade. Dollar depreciation has a quicker and stronger impact to the exports than it has to the imports. The slow effect of depreciating dollar on the trade balance resulted from import volumes increase. The U.S. imports were decreased in response to exchange rates with a dollar depreciating slowing the growth. The rapid shift of trade towards low cost emerging economies continues to corrode U.S. price competitiveness, which would improve the depreciating dollar.

The consistence increase in oil prices also acted as a main contributor to the increased depreciation of dollar. This lead to commodity inflation affecting people's lives directly. U.S. enjoyed a period of better economic growth in year 2006 boosting the imports. This helped in increasing the value of the dollar restoring a better economy to the UnitedStates (China Daily2010). The rising prices of imports caused by depreciation of the dollar reduce the purchasing power of the United States consumers and businesses that purchase imports.

There has been about ten percentage decrease in terms of trade. This is substantially lower compared to dollar depreciation that reflects a positive change in factors other than the exchange rates. To preserve the market share in the U.S. market, importers has show a tendency to incompletely pass through exchange rates depreciations of dollar to the prices of commodities. This achievement absorbs a portion of the exchange rate through slimmer profit margins. This reduces the negative impacts of currency depreciation to the economy's purchasing power.

Dollar exchange rate reflects fundamental economic forces that influence the demand and supply for the assets on international financial market. There is a large potential destabilizing imbalance in the global economy following the depreciative trend of the dollar. U.S. experience persistent trade deficit and large accumulation of international debts. There has been weak domestic demand due to dollar depreciation. It is anticipated that the dollar's continuity to decline in future will be due to increased demand for the imports with fewer exports.

It is expected that dollar will not continue laying its role as the main reserve currency. This has resulted from the collapse.