Question 1 (case study question] The Undermunting of Exports The balance on goods and services in the United States (U.S.) was $342.8 billion in 2001 . It is quite likely that this number is too large of a negative number. In other words, the trade deficit is reported as being higher than is actually the case. The same logic would hold for a country reporting a trade surplus . In this case, the reported surplus is probably too low. This would also affect the numbers reported in the current account . The U.S. provides a convenient example of how this happens. The export of goods is usually undercounted by a nontrivial amount . The U.S. Department of Commerce has reported that the U.S. exports of goods may be undercounted by as much as 10 percent . For 2001 , this would represent uncounted exports of approximately $372 billion . To a large extent , this occurs as U.S. exporters are not obligated to report individual exporE with a value of less than $2500 . As more and more small businesses become exporters, the problem may only get worse. The undercounting of exports is even worse with respect to services . In part, this is a function of how services exports are counted. If a services exporter sells a service to a foreign buyer that is not related to the domestic company, this is recorded as an export of services. However, if a domestic company "sells " a son-ice to a foreign subsidiary of the same company = than this is not an export of services. Essentially, intracompany transactions that cross national borders are not counted as an export of services even though the foreign subsidiary may have to pay for those services. This is not just a problem for the U.S. In one of those interesting anomalies, the world always runs a current account deficit with itself . In 2000, the world ran a current account deficit of $12?.5 billion. This means that the world economy is reporting outflows trading with another planet, exports must be undercounted in the world economy relative to imports. It is becoming increasingly important for governments to obtain a clearer picture of the amount of trade in goods and services. Exports are a large part of GDP in most countries and an undercount of exports means an undercount of GDP. If an important part of managing an economy consists of keeping GDP at an appropriate level, it would be helpful for that data to be accurate Adapted from W. Charles Sawyer and Richard I. Sprinkle , International Economics ,p..21.2 Required (a) Define the following terms used in the article above: (i) Trade deficit . (ii) Trade surplus . (iii) Current account. (5 marks} (b) Based on the article above, explain why the export of goods and services in U.S. are usually undercounted . (3 marks} (c) Based on the article above , U.S. reported a trade deficit in 2001 . Do you agree that the country is worse off when it is running a trade deficit? Why? (6 marks)
