In the last module, we looked at three of the most important issues in macroeconomics: inflation, unemployment, and the rate of economic growth. Let's finish up now with two equally important issues: the large and chronic budget deficits that plague many nations, and the equally large and chronic trade imbalances that exist around the globe among nations with some nations running large trade deficits and others running large trade surpluses. Every year, national governments must live, just like you and I do, with a budget. On the revenue side, governments raise money primarily through taxes ranging from those on consumption, income, and property to payroll. On the expenditure side, the government spends money on national defense and the building of infrastructure such as highways and bridges. In many nations, the government also pays for social services like health care, pensions, and housing assistance for the poor. And, most nations must also expend funds on various forms of regulation: pollution, unsafe working conditions, and monopoly abuses. Note however, that unlike we as individuals, a national government can run persistent budget deficits. That is, a national government can spend more than it raises in revenues in any given year. Of course, over time, a nation's annual budget deficits add up to the cumulative government or public debt. Of course, one big reason national governments can run budget deficits is that, unlike individual citizens who must stay within their budget, they can sell financial instruments like treasury bonds to the public to finance such deficits. However, as we shall see in our lesson on budget deficits, such deficits can exacerbate problems like inflation. By driving up interest rates, budget deficits can also slow down the rate of economic growth. For example, when the government sells bonds to the public to finance its budget deficits, this can drive up interest rates. Rising interest rates in turn, can lower business investment because of the rise in the cost of borrowed funds. Reduced business investment then slows down the rate of growth in the real gross domestic product. This is a phenomenon known as crowding out, and we will talk more about the effects of crowding out on businesses in a later lesson. For now, take a few minutes to study this figure before moving on. Just as nations can run budget deficits, nations can also run trade deficits or perhaps trade surpluses. In fact, as the world economy has become more and more interconnected, the nation's trade has become more and more important as a driver of economic growth. Just recall our Keynesian equations shown here. You can see that if a nation runs a trade deficit, that is, if it's net exports are negative, and that country is consuming more import than it is exporting the products of that nation, that trade deficit is actually a drag on GDP growth. So, in our lesson on international trade, we will really dig deep Into what provides various countries with comparative and competitive advantages in world markets. We will also learn, why, when some nations cheat by using unfair trade practices, result in trade imbalances caused by unfair trade practices can cause significance toward disruptions in the global economy by inducing recessionary shocks and instability in currency markets.
