Unbalanced international trade flows and their implication: an extensive review

The relationship between international trade flows and key macroeconomic variables such as economic growth, Export (X), and Import (M), among others is one of the most widely debated areas among economists and policy makers around the globe. The aim of this paper is to review the extensive literature in this area, focusing on both the theoretical debate and empirical evidence. This review is important in order to learn from past experience and to derive major conclusions which can be beneficial in macroeconomic debates. In addition, this review could also assist policy makers in formulating the right economic policies to tackle problems such as the high Trade Deficit (TD) and high debt levels associated with international trade flows. The majority of these studies used X, M, Gross Domestic Product (GDP) and related relative competitiveness variables, such as relative prices to examine the economic prosperities various countries’ overtime. The key outcomes from these studies showed that relatively open economies countries seem to achieve higher economic prosperity than the less open economies. However, unbalanced trade, in particular the TD and subsequent rising debt levels with the Rest of the World (RoW), lead to undesirable macroeconomic consequences. In relation to Australia, the bulk of the empirical studies show that Australia has experienced a persistent TD for the past 30 years, with increasing TD as a percentage of the GDP. The key outcomes from empirical studies presented in this paper show that Australia’s growing liabilities with the RoW are intended predominantly for other than investment purposes, which may perhaps weaken the economic prosperity in Australia in the future. In addition, various policy implications which might arise from the debates are also discussed in the paper.