"This analysis has four
parts. The first discusses the basics of national income accounting and
explains how trade deficits amount to a loss of demand that must be offset from
other sources if the economy is to sustain a full-employment level of output.
The second part outlines the origins of our large recent trade deficits. The
United States has run trade deficits for most of the last four decades, but
they became qualitatively larger in the late 1990s, in line with a rising value
of the dollar. The third section discusses how lowering the value of the dollar
relative to other currencies could make U.S. goods and services more competitive
internationally. The fourth section addresses some of the implications of a
lower-valued dollar and balanced trade. It has often been claimed that the
United States must run a trade deficit because of the dollar’s status as a
reserve currency. As will be shown, this claim misunderstands both the nature
of reserve currencies and the workings of the international finance system."
