Earlier, some time around January or February this year, the USD exchange rate took a nose dive and became very weak. A weak USD should, would or could increase export because a weak USD means local goods are made cheaper relative to foreign goods. This would make the local consumers to switch from foreign to local goods. Also, foreigners’ demand for local goods should rise. This directly means that import should fall and export should rise, resulting in lower/bigger trade deficit/surplus.
However, quite the contrary, instead of being reduced, the US trade deficit continues to grow. Currently, the trade deficit is at a record breaking $46 billion. According to an AFP report:
“It probably suggests the US dollar has not depreciated enough over the last couple of years to stabilize the external balances”
That is the easy explanation to why the trade deficit does not follow the marcoeconomics theory.
Economics is an easy science, isn’t it? When something doesn’t go with the theory, let’s assume we have a can opener.
But of course, despite the notorious term of ceteris paribus (a latin term which means all things equal), there are other reasons that need to be considered. Other then AFP, both CNN Money and Reuters state that the high crude oil price helps fuel the trade deficit.
This sounds a good explanation, I guess, because oil does seem to have a low elasticity of demand. A low elasticity of demand translates to the phrase “a huge increase price would not affect demand greatly”. I don’t see people quit driving their car despite seeing the rise in oil price.
This makes me wonder – how high does the oil price need to go until demand for oil actually falls substantially?
p/s – The US registers a budget surplus for April.
pp/s – propaganda against H2 via Seat of the Revolution.
ppp/s – for those of you who are interested in seeing the Nick Berg beheading video, it can be found here and here. Courtesy of Wikipedia. Be warned, it is graphic. I hope justice will get those bastards.
