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International Trade and Finance
Introduction
The macroeconomy is especially important to the functioning overall economy of the
United States. Numerous factors that go into determining the macroeconomy, including Gross
Domestic Product, unemployment, inflation, interest rates, exchange rates, and trade. The U.S.
macroeconomy has been struggling since the recession of 2007, but is slowly making a recovery.
The GDP alone rose 2.7 percent from the second to third quarter of 2012, unemployment is
down to 7.9 percent from the high rates seen in 2011, the inflation rate sits at an average 2.2
percent, interest rates have remained low at 0.25 percent, and import and export prices are
remaining steady (Trading economies, 2012). All of these numbers, however, can be affected by
the trade the U.S. engages in.
Surplus of Imports
One issue in trade that can affect the U.S. macroeconomy is a surplus of imports. This
occurs when goods are imported at a level greater than the demand by U.S. consumers. Such
actions can result in the price of goods being driven downward. This would be true not only for
the good that is being imported in surplus, but also all substitute goods as well. A surplus would
result in lower prices as the lower prices are intended to increase demand for such products.
However, the price for substitute goods must also decrease if they are to remain competitive with
the goods being imported.
An example of surplus of imports can be seen in the steel industry. While there are still
U.S. steel manufacturers, many have been forced to close due to the increasingly lower and
INTERNATIONAL TRADE & FINANCE
competitive prices being forced by excessive imports, which is unrealistic for a domestic
producer. While the import of steel mill products decreased 2.7 percent in September of 2012,
domestic production decreased by 6.8 percent while the trade deficit increased 2.9 percent
(“Steel,” 2012).
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Effects of International Trade
Just as a surplus of imports can drive down prices, international trade can affect the
nation’s GDP and domestic markets. The GDP is a gauge of the volume of production of goods
and services by a country within a specific timeframe, taking into consideration consumption,
investment, government spending, and trade. If the U.S. has high imports, the GDP will be
positively affected. On the other hand, imports are subtracted from the GDP, meaning that if the
U.S. imports more than they export the GDP would be adversely affected (Taylor, 2007).
Likewise, an influx of imports could adversely affect domestic markets, as prices would be
driven down resulting in lower profits and less production. However, there could be mixed
effects of imports upon university students. Positive effects would be lower prices, which would
allow university students to afford more goods, while negative effects could be realized in the
form of a weaker job market upon graduation.
Government Choices
The government does have some tools available to them to help control the influx of
imports and thus to protect the domestic market. These tools include tariffs, which are a tax
imposed upon goods being imported or exported, and quotas, which limit the amount of goods
being imported or exported (Taylor, 2007). However, caution must be used as the use of such
tools can influence international relations and overall trade. The use of such tools decreases the
INTERNATIONAL TRADE & FINANCE
supply of a good from imports, which in turn raises domestic prices and increases domestic
production.
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The implementation of tariffs or quotas can adversely affect international relations as the
limit of imports could drastically affect the importing country’s exports. For instance, if the U.S.
would create a tariff or quota on goods from China, China’s GDP would be adversely affected
due to decreased exports. This could create a situation where retaliation is possible by the
importing country placing tariffs and quotas on American exports, which would also adversely
affect the U.S. GDP. If both countries do this to each other, there could be even greater impact
on third-party countries either negative or positive. Therefore, the use of tariffs and quotas
should be used lightly.
Foreign Exchange Rates
International trade is also affected by foreign exchange rates. Foreign exchange rates are
how much one currency can be exchanged for another. In other words, what is one currency’s
value in comparison to the value of another currency. The foreign exchange rate is determined
by taking into consideration many different factors. Such factors include inflation, interest rates,
the balance of trade between a country and its trading partners, the country’s debt, terms of trade,
political stability, and economic performance.
Foreign exchange rates can drastically affect trade, based upon the value of the currency,
such as the U.S. dollar versus the Chinese Yuan. If the value of the dollar were increasing then it
would be more expensive to engage in trade with China. On the other hand, if the value of the
dollar were decreasing then it would be less expensive to engage in trade. However, the benefit
of international trade based solely upon the dollar value will be dependent upon the foreign
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exchange rate, which fluctuates one a daily basis based upon the current day’s value.
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Restriction of Goods from China
The U.S. must maintain a delicate balance of imports and exports. However, the country
has imported more than it has exported for many years. With many of these imports coming
from China, it would be near impossible for the U.S. to simply restrict all goods coming in from
China. For starters, the cost of goods that are typically imported from China would rise in price,
which in turn could drastically affect the quality of life of Americans. Stopping all imports from
China would result in prices in general increasing. Increasing prices would put additional strain
upon the wallets of Americans who are already struggling to make ends meet with high
unemployment rates and a weak economy. Likewise, the U.S. cannot simply minimize the
imports coming in from other countries either. Stopping all imports would require all
manufacturing to move back to domestic markets. While this may be beneficial for the
unemployment rate, prices would suffer, as well as environmental conditions from the increase
in manufacturing plants and the pollution that comes along with them.
Conclusion
Overall, the current state of the U.S. macroeconomy is improving. However, the
improvement will not be realized overnight. As evidenced here, many different factors go into
determining the state of the macroeconomy, with international trade and finance playing a major
role. It is essential that the importance of international trade and finance be understood when
analyzing the macroeconomy so that relevant policies can be discussed and implemented to help

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