What is 'Trade Deficit'?

Trade deficit is an economic measure of a negative balance of trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets.

Explanation: Economic theory dictates that a trade deficit is not necessarily a bad situation because it often corrects itself over time. However, a deficit has been reported and growing in the United States for the past few decades, which has some economists worried. This means that large amounts of the U.S. dollar are being held by foreign nations, which may decide to sell at any time. A large increase in dollar sales can drive the value of the currency down, making it more costly to purchase imports.

What is ALU?

Short for Arithmetic Logic Unit, the ALU is a complex digital circuit; one of many components within a computer's central processing unit. It performs both bitwise and mathematical operations on binary numbers and is the last component to perform calculations in the processor. The ALU uses to operands and code that tells it which operations to perform for input data. After the information has been processed by the ALU, it is sent to the computer's memory.

Multiple Arithmetic Logic Units can be found in CPUs, GPUs and FPUs. In some computer processors, the ALU is divided into an AU and LU. The AU performs the arithmetic operations, and the LU performs the logical operations.

What is 'Sterilization'?

Sterilization is a form of monetary action in which a central bank seeks to limit the effect of inflows and outflows of capital on the money supply. Sterilization most frequently involves the purchase or sale of financial assets by a central bank, and is designed to offset the effect of foreign exchange intervention. The sterilization process is used to manipulate the value of one domestic currency relative to another, and is initiated in the foreign exchange market.

Explanation: Sterilization requires a central bank to look beyond its borders by getting involved in foreign exchange. For example, the Federal Reserve purchases a foreign currency, in this case the yen, and the purchase is made with dollars that the Fed had in its reserves. This action results in there being less yen in the overall market - it has been placed in reserves by the Fed - and more dollars, since the dollars that were in the Fed’s reserve are now in the open market. To sterilize the effect of this transaction the Fed can sell government bonds, which removes dollars from the open market and replaces them with a government obligation.

Emerging markets can be exposed to capital inflows when investors buy up domestic currencies in order to purchase domestic assets. For example, a U.S. investor looking to invest in India must use dollars to purchase rupees. If lots of U.S. investors start buying up rupees, the rupee exchange rate will increase. At this point the Indian central bank can either let the fluctuation continue, which can drive up the price of Indian exports, or it can buy foreign currency with its reserves in order to drive down the exchange rate. If the central bank decides to buy foreign currency it can attempt to offset the increase of rupees in the market buy selling rupee-denominated government bonds.