A Quick and Dirty Lesson about the Trade Deficit

Daniel J. IkensonThe trade balance is calculated as the difference between the value of U.S. exports and the value of U.S. imports. The United States “runs a trade deficit” when Americans purchase more goods and services from foreigners than foreigners purchase from Americans.To be more precise, the trade deficit is the amount by which the total value of purchases of U.S. consumers, businesses, and governments from foreign suppliers exceeds the total value of purchases of foreign consumers, businesses, and governments from U.S. suppliers.The trade deficit gets a  lot of negative attention. It’s got a bad reputation—probably because it’s called a “deficit.” Sounds like something that needs fixing. But the truth is that the trade deficit has a lot going for it. It’s just, well, misunderstood.Over the years,my colleagues and I  have written extensively about the real meaning of the trade deficit; that it is not a  reflection of trade policy; that it is to be expected for a country whose government issues the world’s primary reserve currency; and that the dollars that go abroad to purchase imports find their way back into the U.S. economy in the form of investment in equities, real estate, factories, othe r structures, equipment, and corporate and government debt; and that the only portion of that capital inflow from foreigners that current and future taxpayers need to repay is the principal and interest on government debt (which implicates fiscally irres...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs