The trade balance is a major indicator of foreign exchange trends. Seen in isolation, measures of imports and exports are important indicators of overall economic activity in the economy.

It is often of interest to examine the trend growth rates for exports and imports separately. Trends in export activities reflect the competitive position of the country in question, but also the strength of economic activity abroad. Trends in import activity reflect the strength of domestic economic activity.

Typically, a nation that runs a substantial trade balance deficit has a weak currency due to the continued commercial selling of the currency. This can, however, be offset by financial investment flows for extended periods of time.

The summation of aggregate production, or the output of all the factories, farms, and businesses, measured in the price of a one year span. Potential GDP is when the extent of the economy’s labor, land, capital, and business capability is completely utilized, at which point Real GDP = Potential GDP. The ability of the economy to grow at a long term rate is measured by the rate at which Potential GDP is growing. Real GDP’s fluctuations back and forth around Potential GDP can be explained by the Business Cycle.

The Business Cycle is the cyclical expanding and contracting of the economy as a whole. When the economy is in a depreciating cycle, retail sales fall, orders for capital equipment stagnate, unemployment rates increase, and inventories expand, caused by an inability of goods being sold. When the economy is in an appreciating cycle, business sales expand, unemployment rates begin to decrease, businesses begin to purchase equipment, and inventories begin decreasing do to the ability of producers to run at full capacity.

The Federal Debt in general has an impacting effect upon financial markets. As the Federal Debt grows, the government can either raise interest rates, or print more money. With interest rates running at high levels, it leaves the FOMC with very little room, in order to fight off inflation. The increase of the money supply has inflationary effects upon the economy, because of the discrepancy it would cause between the money supply and the amount of goods available for purchase. The Federal Debt has tended to follow GNP from a charting perspective and has increased and decreased as a percentage of GNP in relationship to the expansion and contraction of the economy. As the economy expands it allows for the reduction of the Federal Debt and as the economy contracts the Federal Debt begins to grow.