All You Need To Know About "Trade Deficits"

Paul V. Hartman

The only closed economic system is the world economic system. For every buyer, there is a seller. If an American uses $1 to buy chop stix from Hong Kong, and the seller buys IBM stock in America with the dollar, then there has been $1 added to the US "trade imbalance", as money returning to the US as an investment is not counted as "trade."

Normally, a good economy will spend in foreign markets, running a trade "deficit", whereas a weak one will do the opposite. The US ran a trade deficit for its first 100 years, without harm, whereas during the Great Depression it ran a trade surplus.

Think twice, then, when you hear politicians bemoaning a trade deficit. It is very likely a sign of a healthy economy. The truth is in the bottom line: if there is a trade deficit, is there an investment surplus? Does the surplus exceed the deficit? If yes, the economy is very healthy indeed. In fact, we will have to spend the excess, to keep the world in harmony, which may translate into buying more chop stix.

--= The Hartman Web Site © , 1996 All rights reserved. =--