well an increase in oil prices result in a shock to potential output . using a AD/AS model it shift the LRAS leftwards. that causes a expansionary gap. thus should the federal reserves do not intervene and the economy is left to self correct. the expansionary gap might result in an increase in imports.

also an increase in oil prices result in increase prices of imports . assuming contant exports you will have imports more than exports . that result in a trade deficit.

q2) What determines demand for American exports in the rest of the world? Why is demand for American goods and services falling even as their prices decline due to deflation in the US?

foreigners determine the demand of american exports. mainly the exchange rate of the USD to the rest of the world. therefore a strong USD result in american exports to be expensive comparative to the foreign counterparts such as CHina . in addition with china able to produce at low costs. and beijing strict control over the RMB by keeping it undervalued. the american exports are always going to be more expensive . thus even with a deflation. the goods are seen as more expensive compare to developing countries produce.

q3)Where does America get the money to buy hundreds of dollars more in imports than it sells in exports? What do foreigners do with all the US dollars they earn from their enormous trade surplus with the US?

amercian get its money to buy its imports through the global savings glut. where by delveloping countries send their savings to developed countries like the USA. thus it result in excess supply of liquidty in the USA. thus interest rates are low in the USA. and that result in increase optisim , thus lending standards relaxed.

the foreigners use all the foreign reserved and term them as their internationa foregn reserves. thus they use it for two purposes.

firstly , they use it as a buffer for their domestic currency. should their currency suffer a speculative attack . they can use this extra USD and sell them to buy in the excess supply of domestic currency.

secondly, they use the USD to lend to countires in crisis and earn interest on loan repayments.

q4)Why doesn’t the US government simply place tariffs or quotas on imports to try and achieve more balanced trade with the rest of the world? Is this an appropriate response to a trade deficit?

no this is not approipriate as shoudl the USA do that. its a form of protectionism. this may result in trading partners to retaliate by bycotting USA made products. result in zero exports. also foreigners may withdraw all FDI (foregin direct investements) from the USA. decrease I. a decreas in I and decrease in NX result in a decrease in AD and lower economic growth.

Like or Dislike: 0  0

u said "As a nation experiences deteriorating terms of trade, it finds itself moving towards a deficit in its current account, meaning that expenditures on imports are growing more than income from exports, also called a trade deficit."

isnt it the other way round?

when Price of imports increase, due to the reverse J curve, it should therefore be elastic in the long run. This would lead to a decrease in the Value M in the current account, causing BOP to head out of deficit/into a surplus.

Or is the assumption there that it causes a trade deficit in the short run?

Like or Dislike: 0  0