A trade theory explanation of global imbalances

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There has been concern for many years over the large and growing trade imbalances of various countries in the world economy. This has led to calls for “global rebalancing” in which countries with persistent trade deficits, such as the United States, would reduce net imports while countries with persistent trade surpluses, such as China, would reduce net exports. This issue has become associated with concerns about the managed exchange rates of China and other economies as well as budget imbalances of the United States and other economies. The purpose of this chapter is to look at global imbalances from the perspective that a trade theorist would take to global trade. The issue is whether trade imbalances are necessarily harmful to global welfare and, therefore, a sign that policies are needed to correct them.

Related Subject(s): Economic and Social Development
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