Explain The Trade Deficit
The only thing negative about "trade deficits" consists of the name.
Introduction
What Is a Trade Deficit?
A trade deficit occurs when a country's imports exceed its exports. A trade deficit is also referred to as a negative balance of trade (BOT). The balance can be calculated on different categories of transactions: goods (a.k.a., "merchandise"), services, and goods and services. Balances are also calculated for international transactions—current account, capital account, and financial account.
Clipped from Trade Deficit: Definition, When It Occurs, and Examples
I cannot decide for you whether to believe "deficits" represent a threat to this economy. I only ask questions. You have to come up with the answers.
Nature of Exchange
To test the logic behind the concept of trade "deficits," we must examine the nature of exchange. I plan to discuss exchange in more detail in future blog posts. For now, I must consider it sufficient to state that in every exchange, both parties gain. Each party values what they get more than what they give. Otherwise, no exchange will occur. Thus, neither trader could suffer a "deficit." Each party to the transaction ends up better off than they were before making the trade. Because the parties are located in different countries, this fact remains unchanged.
Monolithic Economy?
Should we treat the entire economy as a single exchange? Does it make sense to aggregate all exchanges with entities located in foreign countries and treat them as a single exchange?
The definition of "trade deficit" as normally stated presumes that nations trade as monolithic entities. Trades, however, do not occur between nations. Trades occur between individuals within nations.
I don't think the toy store that spend $1 million for dolls from another country considers it the same as the fabricator spends $1 million for steel from the same country.
As I have said before, aggregating the amount of money that crosses international boundaries provides no useful information about the benefits of individual trades.
Measure of Trade
Does a legitimate measure of trade exist?
I have been careful not to use a unit of measure and instead state this simple definition: "trade deficits." No single unit of measure exists to quantify the goods and services imported and exported. The figures used by statisticians describe only the amount of money that changes hands. They tell us nothing definitive about the benefit (or detriment) to the general economy. They simply cannot tell us that.
Dollar-Denominated Trades
Sellers in foreign countries willingly accept payment in dollars. Would they accept those dollars if they did not value them? What do they do with those dollars after they receive them?
They might use those dollars to buy goods from businesses in other countries. In a roundabout way, those same dollars might circulate around the globe, but they always return to the United States. Some of those dollars take a nearly direct route through the purchase of US government securities.
Self-Inflicted Damage
What have we done in this country to make the alternative of foreign-made goods more attractive? Could it be that through regulation, government spending, and inflation the government has caused many American-made goods to be far less attractive?
In addressing the question of self-inflicted damage, we must always consider the issue of monetary expansion. I will address many aspects monetary expansion in future newsletters. For the sake of this topic consider that monetary expansion makes all dollars less valuable. It ultimately causes the price of all dollar priced goods to rise.
Conclusion
By using the word "deficit," we imply that the country has a problem where none exists. Ill-informed economists and bureaucrats make a living trying to solve a problem that exists only in their heads.
The only real danger comes from the fact that we have "brainwashed" many voters into believing that the government acts to save us when it meddles in the exchanges between individual entities.
Finally, consider the irony of the phrase "free trade agreement." How can a country establish an agreement about "free" trade?
I appreciate this clear, concise information about trade deficits. Is it just another “problem” for politicians — from which to “save” the gullible voters?