Chapter 14. The International Trade and Capital Flows

14.2 Trade Balances in Historical and International Context

Learning Objectives

By the end of this section, you will be able to:

  • Analyze graphs of the current account balance and the merchandise trade balance
  • Identify patterns in U.S. trade surpluses and deficits
  • Compare the U.S. trade surpluses and deficits to other countries’ trade surpluses and deficits

We present the history of the U.S. current account balance in recent decades in several different ways. Figure 14.2 (a) shows the current account balance and the merchandise trade balance in dollar terms. Figure 14.2 (b) shows the current account balance and merchandise account balance yet again, this time as a share of the GDP for that year. By dividing the trade deficit in each year by GDP in that year, Figure 14.2 (b) factors out both inflation and growth in the real economy.

The first graph shows the current account and merchandise trade balance in nominal dollars. Both lines dropped drastically between 1995 and 2005. In 2013, the current account balance is −422.2, and the merchandise trade balance is −702.284. The second graph shows the current account and merchandise trade balance as percentages of GDP. Both dropped around 1986, but increased gradually until 1991, when both dropped again with the low around 2005. As of 2013, both current account and merchandise credit are around –2% and –4% of the GDP respectively.]
Figure 14.2 Current Account Balance and Merchandise Trade Balance, 1960–2015. (a) The current account balance and the merchandise trade balance in billions of dollars from 1960 to 2015. If the lines are above zero dollars, the United States was running a positive trade balance and current account balance. If the lines fall below zero dollars, the United States is running a trade deficit and a deficit in its current account balance. (b) This shows the same items—trade balance and current account balance—in relationship to the size of the U.S. economy, or GDP, from 1960 to 2015.

By either measure, the U.S. balance of trade pattern is clear. From the 1960s into the 1970s, the U.S. economy had mostly small trade surpluses—that is, the graphs in Figure 14.2 show positive numbers. However, starting in the 1980s, the trade deficit increased rapidly, and after a tiny surplus in 1991, the current account trade deficit became even larger in the late 1990s and into the mid-2000s. However, the trade deficit declined in 2009 after the recession had taken hold, then rebounded partially in 2010 and remained fairly stable up through 2019 where things took another big downward turn during the COVID-19 Recession.

US Current Account Balance 1945 - 2021
Figure 14.3 US Current Account Balance 1945 – 2021. The deepest deficits appear right before the Great Recession in 2006 and right after the COVID-19 recession in 2021. For latest data: https://fred.stlouisfed.org/series/NETFI

Table 14.4 shows the U.S. trade picture in 2020 compared with some other economies from around the world. While the U.S. economy has consistently run trade deficits in recent years, Japan and many European nations, among them France and Germany, have consistently run trade surpluses. Some of the other countries listed include Brazil, the largest economy in Latin America; Nigeria, along with South Africa competing to be the largest economy in Africa; and China, India, and Korea. The first column offers one measure of an economy’s globalization: exports of goods and services as a percentage of GDP. The second column shows the trade balance. Usually, most countries have trade surpluses or deficits that are less than 5% of GDP. As you can see, the U.S. current account balance is –2.94% of GDP, while Germany’s is 7.0% of GDP.  It is interesting to note that several of the countries where Exports make up a large percent of GDP are the countries that maintain current account surplus.

Table 14.4 Level and Balance of Trade in 2020 (figures as a percentage of GDP, Source: http://data.worldbank.org/indicator/BN.CAB.XOKA.GD.ZS and https://data.worldbank.org/indicator/NE.EXP.GNFS.ZS)
Exports of Goods and Services Current Account Balance
United States 10.13% –2.94%
Japan 15.53% 2.94%
Germany 43.42% 7.0%
United Kingdom 28.12% –2.67%
Canada 29.36% –1.78%
Sweden 44.56% 5.71%
Korea 36.45% 4.60%
Mexico 40.17% 2.44%
Brazil 16.87% –1.70%
China 18.50% 1.87%
India 18.66% 1.23%
Nigeria 8.83% -3.93%

Self-Check Questions

  1. In what way does comparing a country’s exports to GDP reflect its degree of globalization?
  2. At one point Canada’s GDP was $1,800 billion and its exports were $542 billion. What was Canada’s export ratio at this time?
  3. The GDP for the United States is $18,036 billion and its current account balance is –$484 billion. What percent of GDP is the current account balance?
  4. Why does the trade balance and the current account balance track so closely together over time?

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UH Macroeconomics 2022 Copyright © by Terianne Brown and Cynthia Foreman is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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