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Foreign Trade Policy and the Impact on Aggregate Expenditures and Equilibrium

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FOREIGN TRADE POLICY AND THE IMPACT ON AGGREGATE EXPENDITURES AND EQUILIBRIUM

There are two types of aggregate expenditures:

Autonomous and Induced

Autonomous expenditures are not influenced by real GDP.

Induced expenditures are influenced by real GDP.

Actual aggregate expenditure is always equal to real GDP.

Equilibrium expenditure is the level of planned aggregate expenditure that equals real GDP.

Net export expenditure reflects the international linkages based directly on service and merchandise flows across borders, and indirectly reflects capital flows into and out of a particular country. U.S. foreign trade and global economic policies have changed dramatically during the past two centuries. Since the Great Depression and World War II, the country has sought to reduce trade barriers.

U.S. trade deficits have grown larger since the 1980's and 1990's as the American appetite for foreign goods has outstripped demand for American goods in other countries.

The United States has not always been an advocate of free trade. At times throughout history, the country has had a strong impulse toward economic protectionism by using tariffs to limit imports of foreign goods in order to protect American industry.

A big factor leading to the U.S. trade deficit was a sharp rise in the value of the dollar in the early to mid 1980's. This made U.S. exports more expensive and foreign imports into the United States cheaper. The dollar appreciated because of the recovery from the global recession of 1981-82, and in huge U.S. federal budget deficits which created a significant demand in the United States for foreign capital. That, in turn, drove up interest rates, and led to the rise of the dollar.

Exports are determined by international prices, trade agreements, and the real GDP of foreign countries. All things being equal: the higher foreign prices, the more liberal trade agreements and the higher the real GDP of foreign countries, the higher the exports become. Exports are autonomous of real GDP.

Imports are determined by international prices, trade agreements, and the real domestic GDP. All things being equal: the lower foreign prices, the more liberal trade agreements and

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