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explain if a country would rather have a trade surplus or a trade deficit.
When a nation has a trade surplus, it has control over the majority of its own currency. This causes a reduction of risk for another nation selling this currency, which causes a drop in its value. [ When the currency loses value, it makes it more expensive to purchase imports, causing an even a greater imbalance. Because a trade surplus usually creates a situation where the surplus only grows
(due to the rise in the value of the nations currency making imports cheaper), there are many arguments against Milton Friedman's belief that trade imbalances will correct themselves naturally. Economic theory dictates that a trade deficit is not necessarily a bad situation because it often corrects itself over time. However, a deficit has been reported and growing in the United States for the past few decades, which has some economists worried. This means that large amounts of the U.S. dollar are being held by foreign nations, which may decide to sell at any time. A large increase in dollar sales can drive the value of the currency down, making it more costly to purchase imports. ]
Expert answered|hanzyboy|Points 3898|
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Asked 8/24/2011 2:14:03 AM
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