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Trade deficits: causes and consequences

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  • David M. Gould
  • Roy J. Ruffin

Abstract

According to conventional wisdom, trade balances reflect a country's competitive strength-the lower the trade deficit, the stronger the country's industries and the higher its rate of economic growth. In this article, David Gould and Roy Ruffin review the history of the conventional wisdom and empirically examine whether large overall trade deficits or bilateral trade imbalances are associated with lower rates of economic growth. They find that, once the fundamental determinants of growth have been accounted for, trade imbalances have little effect on rates of economic growth.

Suggested Citation

  • David M. Gould & Roy J. Ruffin, 1996. "Trade deficits: causes and consequences," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 10-20.
    • Handle: RePEc:fip:fedder:y:1996:i:qiv:p:10-20
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    File URL: https://www.dallasfed.org/~/media/documents/research/er/1996/er9604b.pdf
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    References listed on IDEAS

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    1. N. Gregory Mankiw & David Romer & David N. Weil, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 407-437.
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    Cited by:

    1. Gazi M. Hassan & Mark J. Holmes, 2016. "Do Remittances Facilitate a Sustainable Current Account?," The World Economy, Wiley Blackwell, vol. 39(11), pages 1834-1853, November.
    2. Mubasher Iqbal & Rukshana Kalim & Noman Arshed, 2019. "Domestic and Foreign Incomes and Trade Balance - A Case of South Asian Economies," Asian Development Policy Review, Asian Economic and Social Society, vol. 7(4), pages 355-368, December.
    3. Aliyev, Khatai, 2014. "Expected Macroeconomic Impacts of the Accession to WTO on Azerbaijan Economy: Empirical Analysis," MPRA Paper 55096, University Library of Munich, Germany.
    4. Arize, Augustine C., 2002. "Imports and exports in 50 countries: Tests of cointegration and structural breaks," International Review of Economics & Finance, Elsevier, vol. 11(1), pages 101-115, April.
    5. Heidari, Hassan & Katircioglu, Salih Turan & Davoudi, Narmin, 2012. "Are current account deficits sustainable? New evidence from Iran using bounds test approach to level relationships," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 6, pages 1-18.

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    Keywords

    Deficit financing; Free trade;

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