1(a)Balance PaymentsEasy2 marks
US Foreign Trade and Interest Rate Policy
The United States (US) balance of trade deficit increased to US$69.4 billion in March 2024.
The deficit is considered to be undesirable and has caused discussion within the US on how
to decrease it. Current and previous US governments have decided that import tariffs are their
preferred solution.
Following the COVID-19 pandemic, there was a period in 2022 when the annual rate of inflation
was over 10%. Intervention by the Federal Reserve (the US central bank) helped to reduce
the annual rate of inflation to 2.9% by December 2023. This was still above its target rate of
2%. There was uncertainty about whether government policy objectives concerning inflation,
economic growth and employment were all moving in the right direction. This uncertainty and
above-target inflation meant the Federal Reserve decided to leave interest rates unchanged at
5.5%. It also decided to continue its policy of reversing quantitative easing by selling securities to
remove money from money markets.
A secondary effect of this high-interest rate policy was that the US foreign exchange rate had
appreciated by 6.25% during the previous 5 years. This meant that low-income countries (LICs)
had to pay more for their imports priced in US$, such as raw materials, foodstuffs and oil.
These LICs often have an underdeveloped market economy with limited ability to raise tax
revenue. They also have large external debts in US$, the repayment of which restricts their ability
to increase economic development.
Sources: Adapted from; March 2024 Trade Gap is $69.4 Billion, bea.gov, 2 May 2024
Transcript of Chair Powell’s press conference, federalreserve.gov, 1 May 2024
Consumer prices up 2.9 percent, bls.gov, 21 August 2024
Explain why a balance of trade deficit might be regarded as undesirable by the
US government.
Answer
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