The United States' economy is ranked as one of the most globalized economies around the world. Improved technology has positively contributed to the globalization of the US economy with the penetration of multinational companies in foreign countries around the globe. Apart from technology, there are numerous factors that have positively contributed to United States' globalization. For instance, favorable social and economic factors have an upper hand in facilitating globalization in the region. Globalization has been characterized by both positive and negative effects. In the United States, globalization has improved economic activities with neighboring countries leading to economic development. The presence of free trade in the US has led to improved production and trading activities. This allows a greater choice for consumers' goods and services. Therefore, the United States enjoys a great advantage of economies of scale since production of goods is in large amounts .
Globalization, on the other hand, has led to fast and the wider spread of new technology in the United States. As a result of globalization, the US developed new technologies used to facilitate production of goods and services, hence increasing production capacity and performance of these multinational companies. Technological advancement is among factors that have led to significant economic growth and development in a country. As a result, the United States is far much ahead in technological techniques and innovations, which has enhanced economic development. Globalization has also led to massive technological improvement and fast communication between individuals across the world. Dissemination of information, mass communication, and quick communication across the internet has been attributed to globalization. Therefore, globalization has led to a significant improvement of the US economy .
Current account refers to a country's difference between savings and investment. Most countries use the current account to determine economic growth and thus its health. The current account is composed of various variables that contribute to the economy. The current account is achieved through the summation of balance of trade, net current transfers, and net foreign income. There is a positive and a negative current account balance. For a positive current account balance, it signifies that a country is a net lender while a negative current account implies a country is a net borrower. Current account balance is, usually, directly proportional to the net foreign assets. The two major variants of balance of payment include current account and capital account .
The balance of payment is a summary of a nation's transactions with the entire world in a given period of time. The balance of payment is also referred to as the balance of international payments. Balance of payment entails economic transactions between a nation's residents and its non-residents. Economic transactions involve goods and services, financial claims, and transfers among others. These transactions are classified in two broader categories: current and capital account. The current account comprises of goods, services, and current transfers while the capital account constitutes financial instruments transactions .
Balance of trade is an economic term that refers to the difference between a nation's imports and exports. Balance of payment forms the largest proportion of a nation's balance of payment. On the debit side, items like imports, domestic spending abroad, and foreign aid are reflected in the equation. The credit side, on the other hand, comprises of exports, foreign domestic investment, and foreign domestic spending in the economy. A nation will have a trade deficit if it has a large percentage of imports relative to exports. Trade surplus, on the contrary, implies that a nation has a relatively high percentage of exports compared to imports .
Role of profit in international trade, does it replace or complement the regulatory function of pricing?
International trade refers to trade activities across foreign borders. This type of trade is an advanced regional trade since it involves a more comprehensive and vast geographical region. Countries involved in international trade earn foreign investment and returns through economic transactions. International trade is attributed to globalization and advancement in technology. Expansion of a nation's economic activity across foreign borders implies a significant milestone towards economic growth. International trade brings about a large proportion of profit among participating countries. Economic profits accumulated from international trade play an imperative role in a country's economy. On the contrary, international profits do not play any role in the regulatory function of pricing. This is because, in economic transactions, profits are derived from the difference between the selling price and the cost of production. The main objective of undertaking a business venture is profit maximization. In order to achieve this objective, production cost must always be as low as possible. Presence of profits, therefore, implies that the selling price is higher than the cost of production .
Balance of payment always balances because, in theory, current account deficit is usually financed by a net inflow in both financial and capital account. Current account surplus, on the other hand, corresponds to the net outflow of both financial and capital account. This brings about balance of payment in an economy. On the contrary, the balance of trade does not balance because imports cannot always be the same as exports. As aforementioned, balance of trade is the difference between exports and imports at a given period of time. The amount of exports at any given time does not necessarily have to be the same as the imports. A positive balance of trade implies that an economy is favorable due to high exports. A negative balance of trade, on the other hand, implies that the economy is not productive enough to cater for its own.
An unfavorable balance of trade is not healthy for an economy as it has adverse effects on domestic producers. An economy with unfavorable balance of trade translates into high imports of goods and services from foreign countries. As a result, local producers are deprived the opportunity to sell their products due to high competition from high quality foreign products being imported. This, adversely, affects domestic producers as they are demoralized from producing locally manufactured products. As a result, producers need to be protected from importation of such goods and services through the imposition of high import tariffs in order to limit the amount of imports from foreign countries.
Therefore, domestic producers will be motivated to produce more goods and sell them at high prices. This has a significant effect on economic growth and development at large. Governments can also provide incentives for local producers in order to encourage domestic production of goods. These forms of incentives can be through loans, and grants to individuals with viable projects, and also provision of market for manufactured goods. This practice will correct unfavorable balance of trade and thus improve the nation’s economy.
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Arnold, Roger A. Macroeconomics. London: Cengage Learning, 2011.