Trade Deficit

Trade Deficit

Introduction:

The monetary losses or gains of any country are economically determined on the basis of difference between the exports and imports over a certain period of time. The relation between the imports and exports is known as 'balance of trade'. If the balance is positive and there are more exports than imports, the situation is known as 'trade surplus' and if the imports exceed the exports, trade gap or 'trade deficit' results (Bishop, 2009).

Trade Deficit:

Trade deficit or the negative balance of trade indicates the fact that the domestic currency is in a constant state of outflow to foreign markets. The import and export could be either of goods or services or sometimes even both. The situation is considered to be unfortunate for any country, but that might heal up with time as the economy of the country makes certain adjustments to the situation (Sullivan and Steven, 2003).

Economist's view on trade deficit:

Frédéric Bastiat, the 19th century philosopher and economist presented the idea that trade deficits are not losses; instead, they are a demonstration of profit. Bastiat argued that greater national trade deficit was actually an indicator of success of an economy, rather of its failure. He also made the prediction that the more successful a country is, the more trade deficits it would produce as compared to a failing nation, which would have lower trade deficits. The ideas of Bastiat were also confirmed by the 20th century economist Milton Friedman.

Milton Friedman was the Nobel Prize winning economist of 20th century (1980) and is also known as the father of Monetarism. He argued that certain concerns of trade deficit are nothing more than unfair criticism, indented to alter the export policies in a way that it favors the export industry. He also presented the idea that trade deficits are not as significant as they are shown to be, and are not always linked to investment.

David D. Friedman (Milton's son) also shares his father's views and has cited the comparative disadvantage ideas of David Ricardo. In the late 1970s and early 1980s, Friedman's policies defended the stronger dollar when US was experiencing high inflation. At that time, Friedman stated that the inflation and trade deficit are not in any way detrimental for the US economy, as the currency was coming back to the state at the end (Pfeil, 2008). However, if the currency had not been coming back to the country, situation would have been different, and that would have been an alarming situation. Friedman defined the situation by saying that it would be equivalent to the scenario if the exporting country burns all the earned dollars instead of returning them to the market circulation.

Friedman also believed that trade deficits the rise and fall of floating currency with the passage of time causes automatic correction of trade deficits. However, in the real world the situation seems difficult that the currency remains away from the trade market for long, as the government and central bank are major players in the game, and the ...