Countries pursue international trade to achieve their intended national objectives. Notably, international trade services without restrictions and barriers provide countries with numerous economic benefits regarding consumers, producers, the government, and the world economy (Jackson, 2010). In reality, however, trade restrictions and barriers exist because countries use them as political policies or economic measures.
In short, the effects of international trade on the national economy are considerably positive; that is, the total gains exceed the total costs (Jackson, 2010). This essay paper reviews the effects of international trade on the US economy, the current US government restrictions, and their potential impacts, the main determinants of the exchange rate and the impacts of a strong dollar on the US economy.
Effects of International Trade on the US Economy
The effects of international trade on the US economy are evident through the country’s GDP, inflation, unemployment rate, consumers, business firms, and the government. On GDP, international trade has a positive effect on the US economy due to the country’s positive net exports component. Notably, the 1990 to 2008 data show that the US exports accounted for 7 percent to 8 percent of total GDP (Jackson, 2010).
Regarding inflation, it influences inflation through the value of the US currency. A decline in the US exports and a concurrent increase in imports cause a decrease in the dollar value, which in turn triggers inflation. On the unemployment rate, international trade strengthens the shifting of capital and labor from less to more productive economic activities (Jackson, 2010). Therefore, the unemployment rate declines due to the increased demand for the labor needed to produce commodities for global markets.
International trade provides US consumers with a broad range of commodities. Usually, these products are offered at a comparatively lower price than in the case of purely domestic production due to the competition (Jackson, 2010). Besides, a wide range of product selection enhances consumer wellbeing through the provision of quality commodities. On business firms, strengthens their competitiveness and productivity (Jackson, 2010). In short, international trade enables US companies to access cheaper raw materials and labor, as well as markets for their products. Finally, international trade is a source of foreign exchange for the US government via tariffs.
Current US Government Restrictions
The current types of trade restrictions used in the US are tariffs and quotas. By definition, a tariff is a tax imposed on imports or exports; while, a quota is a restriction on the number of imported commodities (Brux, 2015). Mainly, these restrictions encourage or force American consumers to consume domestically produced commodities. Quotas and tariffs have a potential impact on consumers, business firms, the US government, the world economy, and the image of the US as a leading member of WTO. On consumers, quotas limit the choice of goods available to American consumers. Besides, tariffs increase the price of imported commodities (Brux, 2015).
On business firms, restrictions provide US companies with a competitive edge in the US market. In particular, they increase the consumption of domestic products through the high prices and limitations of foreign-made commodities. Regarding the US government, quotas reduce revenues; while, tariffs increase government revenue on imports and exports. In the world economy, restrictions reduce imports and exports (Brux, 2015). Notably, the aspect of retaliation from other countries restrains further imports and exports in the international market. On the country’s image, government restrictions depict the US as a trade conservative that disregards WTO provisions on free trade.
Main Determinants of Exchange Rate
The primary determinants of exchange rate include interest rate, import and export duties, inflation rate, political stability, terms of trade, government debt, and balance of payment (Peng, 2015). Notably, interest rate parity defines the relationship of domestic interest rate, the foreign interest rate, and the anticipated change in the exchange rate. In particular, lenders’ desire to earn high returns (interest rate) influences the demand and supply of foreign bonds and stocks (Boyes & Melvin, 2015).
As a result, their provision of capital in the foreign market increases the value of the domestic currency and vice versa. On the inflation rate, a country with low inflation experiences an appreciation of its currency’s value and vice versa. Regarding the balance of payment, the exchange rate is determined by the current account situation (Peng, 2015).
Mainly, a deficit in the current account due to more expenditure of currency on imports than earnings in exports leads to the depreciation of the currency and vice versa. In terms of trade, the increase in export prices above import prices raises the demand for domestic currency (Peng, 2015). Consequently, the increased demand leads to an appreciation of the currency value. Besides, strong political stability makes investors invest their foreign capital in the country and vice versa. As a result, increased foreign capital leads to an appreciation of the domestic currency. Finally, a massive government debt discourages foreign investment by causing inflation, which compels foreign investors to sell their bonds leading to the decline of the country’s currency.
The Impacts of a Strong Dollar on the US Economy
The effects of a strong dollar on the US economy is notable through imports of goods and services, the unemployment rate, inflation rate, interest rate and the balance of payment. On imports of goods and services, a strong dollar makes US imports cheaper (Tucker, 2010). As a result, American consumers purchase more foreign commodities. On unemployment rate, a strong dollar makes the US produced products expensive. Hence, many Americans consume imported products leading to the decline of production in domestic firms (Tucker, 2010). Consequently, the unemployment rate increases following the decline of labor demand in the US enterprises.
Regarding inflation, a strong dollar reduces inflationary pressures in the US economy. Primarily, it reduces the government debt, which is a major determinant of inflation in a country. On interest rates, a strong dollar improves the interest rate through the flow of foreign capital into the US market. Notably, lenders invest their money due to high returns. On the balance of payment, a strong dollar causes a balance of trade deficit. According to Madura (2015), it increases the price paid for US commodities by foreign consumers; hence, reducing their demand. In short, a strong dollar deteriorates the balance of payment accounts.
International trade has numerous effects on the US economy. For instance, a positive net exports component improves the total GDP of the country. Again, it enables consumers to gain access to a broad range of products at a lower price. On restrictions, the US uses both quotas and tariffs to motivate or force Americans to consume locally produced products. Notably, restrictions favor domestic producers at the expense of consumers. On exchange rate, its main determinants include interest rate, import and export duties, inflation rate, political stability, terms of trade, government debt, and balance of payment. Finally, a strong dollar on the US economy increases the unemployment rate, reduces inflation, and causes a balance of trade deficit.
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Madura, J. (2015). International financial management, abridged (12th ed). Mason, OH: South-Western Cengage Learning.
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Tucker, I. B. (2010). Microeconomics for today (7th ed). Mason, OH: South-Western Cengage Learning.