Global Managerial Economics Essay Example | Topics and Well Written Essays - 750 words

Global Managerial Economics - Essay Example The Balance of Payments (BOP) refers to the sum of all economic exchanges between countries and includes expenses and income from the trade of goods and services, and financial transactions, including foreign direct investment. These exchanges, or transactions, fall under two categories: A Current Account and a Capital Account. The flow of goods, services, and money in and out of the United States is recorded in the current account. When national expenses exceed national income or budget, meaning the current account is â€Å"overdrawn,† it is referred to as a trade deficit. The US finances its current account deficit by issuing securities and bonds. Since fluctuations in the BOP also affects the value of the US dollar, the Federal Reserve uses a managed floating system by occasionally intervening to control fluctuations in the exchange rate. Daniel Griswold, in his 1998 trade policy analysis, states â€Å"No aspect of international trade is†¦ understood less than America’s perennial trade deficit†¦Trade deficits reflect the flow of capital across international borders, flows that are determined by†¦how much people save and invest. This renders trade policy1 an ineffective tool for reducing a nations trade deficit†¦[since] since trade deficit†¦has virtually nothing to do with trade policy.† Griswold explains that a country that has more investments than savings, such as the United States, must bring in capital from overseas through a capital account surplus. These foreign investments enable Americans to buy more goods and services even if they produce less, bridging the gap through a trade deficit. Since the mid-70s, the US has had a yearly trade deficit, reaching $100 billion in 1984 and over $150 billion in 1987. In 1991, the trade deficit dropped to $31 billion, but has been increasing since then, reaching over $190 billion2 in the fourth quarter of 2005 (BEA, 2006). Trade deficits have been blamed for â€Å"unfair† foreign