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Chapter 10: Trade & Currency Wars

their currencies, but he has accused Germany of
benefitting from what he termed the “grossly
undervalued” euro. The Trump Administration is at
loggerheads with other countries over currency
valuations and unfair trade policies.

ADJUSTMENTS
A favorable balance of trade, or a trade surplus,
occurs when more money enters the country than leaves
via trade. However, there are other ways money can
enter or leave a country. For example, when Americans
travel abroad, money leaves, and when foreigners visit
America, money enters.

The term balance of payments refers to money
entering or leaving a country. With a net inflow of
money, we have a favorable balance of payments,
sometimes called a payments surplus. With a net
outflow of money, we have an unfavorable balance of
payments, sometimes called a payments deficit.

A freely flexible international exchange-rate
system will automatically correct a country’s balance of
payments problem. For example, suppose that the
United States has a deficit problem with too much
money leaving the country. As dollars become more
abundant on the international market, its value will
decrease, making foreign goods more expensive for
Americans and American goods cheaper for foreigners.
A reversal occurs when Americans buy less from
foreigners, and foreigners buy more from Americans.

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