Question

In April 2009 the trade deficit of the United State was reported to be $29.2billion. The trade deficit with China for the same month was $16.75 billion. The trend is certain to continue for the foreseeable future. As such, there is a pressure on the US economy that worsens already weak job market. The US officials blame part of this on Chinese government’s refusal to allow the Yuan to float freely and accordingly appreciate against the US dollar. Explain why this trade deficit might be considered as a contributor to unfavorable economic situation in the US and why appreciation of Chinese currency might help to alleviate this situation.

Answer 1

The trade deficit contributes to the unfavorable economic situation by causing job losses. Appreciation of the Chinese currency can help by making Chinese goods more expensive.

Step-by-step explanation:

Trade deficit refers to the situation when the value of a country's imports exceeds the value of its exports. In the case of the United States, the trade deficit with China is seen as a contributor to the unfavorable economic situation because it means that the United States is buying more goods from China than it is selling to China. This leads to a loss of jobs in the United States as industries struggle to compete with cheap imports.

Appreciation of the Chinese currency, the Yuan, can help to alleviate this situation because it would make Chinese goods relatively more expensive for American consumers. This would encourage Americans to buy domestically-produced goods instead, which would stimulate the local economy and create jobs.