The balance of payment can not only influence exchange rates, but also purchasing power.

The balance of payment can not only influence exchange rates, but also purchasing power.

Rebecca Cline

The balance of payment can not only influence exchange rates, but also purchasing power. The balance of payments is the positive and negative flow of trade between those in the United States and foreigners. Balance of payment also shows the demand increase or decrease of currency, both domestic and foreign.  The demand increase or decrease is where balance of payment can have an influence on exchange rates. Purchasing power can also be affected by balance of payment through exchange rates. Purchasing power is affected by exchange rates where the domestic population is mainly operating in their purchasing (Gwartney, et al., 2018).

Although, I do not think there is an overarching answer to the question of whether trade deficits are good or bad, I will take the position that deficits are bad for this discussion. A major con of trade deficit is the dependence on other countries. A trade deficit means that the country is importing more goods than they are exporting. This also means that the country is dependent on the production and supply of another country. The dependence that is exhibited can impose a risk if there is any tension, or any tension develops as well as any causes that could disturb the ability for trade. Another con of trade deficit is that another country is controlling the costs of goods, which impacts customers in the United States and may limit their ability to purchase products (Gwartney, et al., 2018). A trade deficit also demonstrates that the United States is not actively growing our job force due to heavy importation. If the United States created and exported more goods, there would be an enormous increase in number of jobs.  Trade deficits not only have cons, but also have positive implications on the economy. One pro of having a trade deficit is that products are often cheaper. This is due to the fact that the product can be produced cheaper overseas than they can be produced in the United States. Having both imports and exports produces a fair amount of diversification which can lead to a lowered level of risk in some aspects, however, the United States can still be at risk from primary importing countries (Gwartney, et al., 2018).

Resources:

wartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018). Macroeconomics: Private and public choice (16th ed.). Retrieved from https://www.cengage.com