President Trump has argued that the United States should use

President Trump has argued that the United States should use its so that the US trade deficit is eliminated. In the first paragraph, use our analysis of the balance of payments to explain what impact the trade deficit might have on a country\'s position as a net lender or net borrower to the rest of the world. Is this why the United States should worry about having a large trade deficit? President Trump has also committed the United States government to running a large budget deficit for the foresecable future. In the second paragraph, explain how this fiscal policy might affect future trade deficits of the United States.

Solution

Part A

We know that the balance of payments of a country means that a series of accounts that made the trade transaction of the open economy with the rest of the world. Generally, the balance of payments consists of the goods and service accounts, the primary income account, secondary income account and the capital account. Also, the sum of the balances current and a capital account called as the surplus or net lending or and if its called deficit or net borrowing with the rest of the world.

Usually, the trade deficit considered undesirable because they become unsustainable. If the trade deficit occurs for a long period of time then rest of world (or lenders) think that the borrowers will default the loans and they will decide to stop the lending. As net borrowers, they are trying to borrow more from outside of the country. This will create the serious effect of the balance of payment and finally leads to crisis.

Nowadays the US faced a huge trade deficit. Trump think that it is the symbol of economic decline. But the economist not worried about this trade gap.

Part B

We know that the budget deficit means that the expenditure is greater than the income of the country. The expansionary policies will always increase the trade deficit. In the case of a contractionary policy or increases the tax and decreases the spending will decrease the budget deficit. So the US should follow the contractionary fiscal policy to correct the trade deficit of the country.