he balance of trade (or net exports, sometimes symbolized as NX) is the difference between the

monetary value of exports and importsof output in an economy over a certain period. It is the
relationship between a nation's imports and exports.[1] A positive balance is known as a trade
surplus if it consists of exporting more than is imported; a negative balance is referred to as
a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods
and a services balance.

Early understanding of the functioning of balance of trade informed the economic policies of Early
Modern Europe that are grouped under the heading mercantilism. An early statement appeared
in Discourse of the Common Weal of this Realm of England, 1549: "We must always take heed
that we buy no more from strangers than we sell them, for so should we impoverish ourselves
and enrich them."[2]Similarly a systematic and coherent explanation of balance of trade was made
public through Thomas Mun's c1630 "England's treasure by forraign trade, or, The balance of our
forraign trade is the rule of our treasure"[3]

Contents
[hide]

• 1 Definition

• 2 Views on economic impact

o 2.1 Conditions where trade imbalances may be problematic

o 2.2 Conditions where trade imbalances may not be problematic

o 2.3 Adam Smith on trade deficits

o 2.4 Milton Friedman on trade deficits

o 2.5 Frédéric Bastiat on the fallacy of trade deficits

o 2.6 Warren Buffett on trade deficits

o 2.7 John Maynard Keynes on the balance of trade

• 3 Physical balance of trade

• 4 United States Trade Deficit

• 5 See also

• 6 Notes

• 7 External links

[edit]Definition
The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going
through the Panama Canal.

The balance of trade forms part of the current account, which includes other transactions such as
income from the international investment positionas well as international aid. If the current
account is in surplus, the country's net international asset position increases correspondingly.
Equally, a deficit decreases the net international asset position.

The trade balance is identical to the difference between a country's output and its domestic
demand (the difference between what goods a country produces and how many goods it buys
from abroad; this does not include money re-spent on foreign stock, nor does it factor in the
concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems with recording and
collecting data. As an illustration of this problem, when official data for all the world's countries are
added up, exports exceed imports by almost 1%; it appears the world is running a positive
balance of trade with itself. This cannot be true, because all transactions involve an
equal credit or debit in the account of each nation. The discrepancy is widely believed to be
explained by transactions intended to launder money or evade taxes, smuggling and other
visibility problems. However, especially for developed countries, accuracy is likely.

Factors that can affect the balance of trade include:

 The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting
economy vis-à-vis those in the importing economy;
 The cost and availability of raw materials, intermediate goods and other inputs;
 Exchange rate movements;
 Multilateral, bilateral and unilateral taxes or restrictions on trade;
  Non-tariff barriers such as environmental, health or safety standards;
 The availability of adequate foreign exchange with which to pay for imports; and
 Prices of goods manufactured at home (influenced by the responsiveness of supply)

In addition, the trade balance is likely to differ across the business cycle. In export-led growth
(such as oil and early industrial goods), the balance of trade will improve during an economic
expansion. However, with domestic demand led growth (as in the United States and Australia)
the trade balance will worsen at the same stage in the business cycle.

Since the mid 1980s, the United States has had a growing deficit in tradeable goods, especially
with Asian nations (China and Japan) which now hold large sums of U.S debt that has funded the
consumption.[4][5]The U.S. has a trade surplus with nations such as Australia. The issue of trade
deficits can be complex. Trade deficits generated in tradeable goods such as manufactured
goods or software may impact domestic employment to different degrees than trade deficits in
raw materials.

Economies such as Canada, Japan, and Germany which have savings surpluses, typically run
trade surpluses. China, a high growth economy, has tended to run trade surpluses. A higher
savings rate generally corresponds to a trade surplus. Correspondingly, the U.S. with its lower
savings rate has tended to run high trade deficits, especially with Asian nations.

[edit]Views on economic impact

[edit]Conditions where trade imbalances may be problematic
Those who ignore the effects of long run trade deficits may be confusing David Ricardo's principle
of comparative advantage with Adam Smith's principle of absolute advantage, specifically
ignoring the latter. The economist Paul Craig Roberts notes that the comparative
advantage principles developed by David Ricardo do not hold where the factors of production are
internationally mobile.[6][7] Global labor arbitrage, a phenomenon described by economist Stephen
S. Roach, where one country exploits the cheap labor of another, would be a case of absolute
advantage that is not mutually beneficial.[8][9][10] Since the stagflation of the 1970s, the U.S.
economy has been characterized by slower GDP growth. In 1985, the U.S. began its growing
trade deficit with China. Over the long run, nations with trade surpluses tend also to have a
savings surplus. The U.S. generally has lower savings rates than its trading partners, which tend
to have trade surpluses. Germany, France, Japan, and Canada have maintained higher savings
rates than the U.S. over the long run.[11]

Few economists believe that GDP and employment can be dragged down by an over-large deficit
over the long run.[12][13] Others believe that trade deficits are good for the economy.
[14]
The opportunity cost of a forgone tax base may outweigh perceived gains, especially where
artificial currency pegs and manipulations are present to distort trade.[15]

Wealth-producing primary sector jobs in the U.S. such as those in manufacturing and computer
software have often been replaced by much lower paying wealth-consuming jobs such those in
retail and government in the service sector when the economy recovered from recessions.[7][16]
[17]
Some economists contend that the U.S. is borrowing to fund consumption of imports while
accumulating unsustainable amounts of debt.[4][18]

In 2006, the primary economic concerns focused on: high national debt ($9 trillion), high non-
bank corporate debt ($9 trillion), high mortgage debt ($9 trillion), high financial institution debt
($12 trillion), high unfunded Medicare liability ($30 trillion), high unfunded Social Security liability
($12 trillion), high external debt (amount owed to foreign lenders) and a serious deterioration in
the United States net international investment position (NIIP) (-24% of GDP),[4] high trade deficits,
and a rise in illegal immigration.[18][19]

These issues have raised concerns among economists and unfunded liabilities were mentioned
as a serious problem facing the United States in the President's 2006 State of the Union address.
[19][20]
On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the U.S. to increase
its manufacturing base employment to 20% of the workforce, commenting that the U.S. has
outsourced too much in some areas and can no longer rely on the financial sector and consumer
spending to drive demand.[21]

See also: Friedrich List

[edit]Conditions where trade imbalances may not be problematic
Small trade deficits are generally not considered to be harmful to either the importing or exporting
economy. However, when a national trade imbalance expands beyond prudence (generally
thought to be several[clarification needed] percent of GDP, for several years), adjustments tend to occur.
While unsustainable imbalances [22] may persist for long periods (cf, Singapore and New
Zealand’s surpluses and deficits, respectively), the distortions likely to be caused by large flows of
wealth out of one economy and into another tend to become intolerable.[citation needed]

In simple terms, trade deficits are paid for out of foreign exchange reserves, and may continue
until such reserves are depleted. At such a point, the importer can no longer continue to purchase
more than is sold abroad. This is likely to have exchange rate implications: a sharp loss of value
in the deficit economy’s exchange rate with the surplus economy’s currency will change the
relative price of tradable goods, and facilitate a return to balance or (more likely) an over-shooting
into surplus the other direction.
More complexly, an economy may be unable to export enough goods to pay for its imports, but is
able to find funds elsewhere. Service exports, for example, are more than sufficient to pay
for Hong Kong’s domestic goods export shortfall. In poorer countries, foreign aid may fill the gap
while in rapidly developing economies a capital account surplus often off-sets a current-
account deficit. Finally, there are some economies where transfers from nationals working abroad
contribute significantly to paying for imports. The Philippines, Bangladesh and Mexico are
examples of transfer-rich economies.

[edit]Adam Smith on trade deficits

"In the foregoing part of this chapter I have endeavoured to show, even upon the principles of the
commercial system, how unnecessary it is to lay extraordinary restraints upon the importation of
goods from those countries with which the balance of trade is supposed to be disadvantageous.
Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon
which, not only these restraints, but almost all the other regulations of commerce are founded.
When two places trade with one another, this [absurd] doctrine supposes that, if the balance be
even, neither of them either loses or gains; but if it leans in any degree to one side, that one of
them loses and the other gains in proportion to its declension from the exact equilibrium." (Smith,
1776, book IV, ch. iii, part ii) [23]

[edit]Milton Friedman on trade deficits

In the 1980s, Milton Friedman, the Nobel Prize-winning economist and father of Monetarism,
contended that some of the concerns of trade deficits are unfair criticisms in an attempt to push
macroeconomic policies favorable to exporting industries.

Prof. Friedman argued that trade deficits are not necessarily important as high exports raise the
value of the currency, reducing aforementioned exports, and vice versa for imports, thus naturally
removing trade deficits not due to investment. Since 1971, when the Nixon administration
decided to abolish fixed exchange rates, America's Current Account accumulated trade deficits
have totaled $7.75 Trillion as of 2010. This deficit exists as it is matched by investment coming in
to the United States- purely by the definition of the balance of payments, any current account
deficit that exists is matched by an inflow of foreign investment.

Milton Friedman's son, David D. Friedman, shares his father's view and cites the comparative
advantage concepts of David Ricardo.[24]

In the late 1970s and early 1980s, the U.S. had experienced high inflation and Friedman's policy
positions tended to defend the stronger dollar at that time. He stated his belief that these trade
deficits were not necessarily harmful to the economy at the time since the currency comes back
to the country (country A sells to country B, country B sells to country C who buys from country A,
but the trade deficit only includes A and B). However, it may be in one form or another including
the possible tradeoff of foreign control of assets. In his view, the "worst case scenario" of the
currency never returning to the country of origin was actually the best possible outcome: the
country actually purchased its goods by exchanging them for pieces of cheaply-made paper. As
Friedman put it, this would be the same result as if the exporting country burned the dollars it
earned, never returning it to market circulation.[25] This position is a more refined version of the
theorem first discovered by David Hume.[26] Hume argued that England could not permanently
gain from exports, because hoarding gold (i.e., currency) would make gold more plentiful in
England; therefore, the prices of English goods would rise, making them less attractive exports
and making foreign goods more attractive imports. In this way, countries' trade balances would
balance out.[27]

Friedman believed that deficits would be corrected by free markets as floating currency rates rise
or fall with time to encourage or discourage imports in favor of the exports, reversing again in
favor of imports as the currency gains strength. In the real world, a potential difficulty is that
currency markets are far from a free market, with government and central banks being major
players, and this is unlikely to change within the foreseeable future. Nevertheless, recent
developments have shown that the global economy is undergoing a fundamental shift. For many
years, the U.S. has borrowed and bought while in general, the rest of the world has lent and sold.
However, as Friedman predicted, this paradigm appears to be changing.

As of October 2007, the U.S. dollar weakened against the euro, British pound, and many other
currencies. For instance, the euro hit $1.42 in October 2007,[28] the strongest it has been since its
birth in 1999. Against this backdrop, American exporters are finding quite favorable overseas
markets for their products and U.S. consumers are responding to their general housing slowdown
by slowing their spending. Furthermore, China, the Middle East, central Europe and Africa are
absorbing more of the world's imports which in the end may result in a world economy that is
more evenly balanced. All of this could well add up to a major readjustment of the U.S. trade
deficit, which as a percentage of GDP, began in 1991.[29]

Friedman contended that the structure of the balance of payments was misleading. In an
interview with Charlie Rose, he stated that "on the books" the US is a net borrower of funds,
using those funds to pay for goods and services. He essentially claimed that the foreign assets
were not carried on the books at their higher, truer value.[citation needed]

Friedman presented his analysis of the balance of trade in Free to Choose, widely considered his
most significant popular work.

[edit]Frédéric Bastiat on the fallacy of trade deficits

The 19th century economist and philosopher Frédéric Bastiat expressed the idea that trade
deficits actually were a manifestation of profit, rather than a loss. He proposed as an example to
suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit.
He supposed he was in France, and sent a cask of wine which was worth 50 francs to England.
The customhouse would record an export of 50 francs. If, in England, the wine sold for 70 francs
(or the pound equivalent), which he then used to buy coal, which he imported into France, and
was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the
customhouse would say that the value of imports exceeded that of exports and was trade deficit
against the ledger of France.[30]

By reductio ad absurdum, Bastiat argued that the national trade deficit was an indicator of a
successful economy, rather than a failing one. Bastiat predicted that a successful, growing
economy would result in greater trade deficits, and an unsuccessful, shrinking economy would
result in lower trade deficits. This was later, in the 20th century, affirmed by economist Milton
Friedman.

[edit]Warren Buffett on trade deficits

The successful American businessman and investor Warren Buffett was quoted in the Associated
Press (January 20, 2006) as saying "The U.S trade deficit is a bigger threat to the domestic
economy than either the federal budget deficit or consumer debt and could lead to political
turmoil... Right now, the rest of the world owns $3 trillion more of us than we own of them." Buffett
has proposed a tool called Import Certificatesas a solution to the United States' problem and
ensure balanced trade.[31]

[edit]John Maynard Keynes on the balance of trade

In the last few years of his life, John Maynard Keynes was much preoccupied with the question of
balance in international trade. He was the leader of the British delegation to the United Nations
Monetary and Financial Conference in 1944 that established the Bretton Woods system of
international currency management.

He was the principal author of a proposal — the so-called Keynes Plan —— for an International
Clearing Union. The two governing principles of the plan were that the problem of settling
outstanding balances should be solved by 'creating' additional 'international money', and that
debtor and creditor should be treated almost alike as disturbers of equilibrium. In the event,
though, the plans were rejected, in part because "American opinion was naturally reluctant to
accept the principal of equality of treatment so novel in debtor-creditor relationships".[32]

His view, supported by many economists and commentators at the time, was that creditor nations
may be just as responsible as debtor nations for disequilibrium in exchanges and that both should
be under an obligation to bring trade back into a state of balance. Failure for them to do so could
have serious consequences. In the words of Geoffrey Crowther, then editor of The Economist, "If
the economic relationships between nations are not, by one means or another, brought fairly
close to balance, then there is no set of financial arrangements that can rescue the world from the
impoverishing results of chaos."[33]

These ideas were informed by events prior to the Great Depression when — in the opinion of
Keynes and others — international lending, primarily by the U.S., exceeded the capacity of sound
investment and so got diverted into non-productive and speculative uses, which in turn invited
default and a sudden stop to the process of lending.[34]

Influenced by Keynes, economics texts in the immediate post-war period put a significant
emphasis on balance in trade. For example, the second edition of the popular introductory
textbook, An Outline of Money,[35] devoted the last three of its ten chapters to questions of foreign
exchange management and in particular the 'problem of balance'. However, in more recent years,
since the end of the Bretton Woods system in 1971, with the increasing influence
of Monetarist schools of thought in the 1980s, and particularly in the face of large sustained trade
imbalances, these concerns — and particularly concerns about the destabilising effects of large
trade surpluses — have largely disappeared from mainstream economics discourse[36] and
Keynes' insights have slipped from view.[37] They are receiving some attention again in the wake
of the Financial crisis of 2007–2010.[38]

[edit]Physical balance of trade

Monetary balance of trade is different from physical balance of trade[39] (which is expressed in
amount of raw materials, known also as Total Material Consumption). Developed countries
usually import a lot of primary raw materials from developing countries at low prices. Often, these
materials are then converted into finished products, and a significant amount of value is added.
Although for instance the EU (as well as many other developed countries) has a balanced
monetary balance of trade, its physical trade balance (especially with developing countries) is
negative, meaning that a lot less material is exported than imported. For this reason, activists talk
about the issue of ecological debt which implies a sort of predatory economic system. The nature
of the trade balance statistics is such that it conceals distorted material flow.

[edit]United States Trade Deficit

United States balance of trade (1980–2010), with negative numbers denoting a trade deficit

The U.S. has held a trade deficit starting late in the 1960s. It was this very deficit that forced the
United States in 1971 off the gold standard. Its trade deficit has been increasing at a large rate
since 1997 [40] (See chart) and increased by 49.8 billion dollars between 2005 and 2006, setting a
record high of 817.3 billion dollars, up from 767.5 billion dollars the previous year.[41]

The graph indicates that, as Frédéric Bastiat predicted, the deficit slackened during recessions
and grew during periods of expansion. Also of note, many economists calculate trade deficits
and/or current account deficits as a percentage of GDP. The US last had a trade surplus in 1975.
[42]
Every year there has been a major reduction in economic growth, it is followed by a reduction
in the US trade deficit.[29]

[edit]See also

 Current account
 Balance of payments
 FRED (Federal Reserve Economic Data)
 Marshall–Lerner condition

Lists:

 List of countries by current account balance

 List of the largest trading partners of the United States
  List of the largest trading partners of the People's Republic of China
 List of the largest trading partners of India

[edit]Notes

Excess of imports over exports (trade deficit) or of exports over imports (trade
surplus), resulting in a negative or positive Balance of Trade. The balance of trade is made up
of transactions in merchandise and other movable goods and is only one factor comprising the
larger current account (which includes services and tourism, transportation, and
other invisible items, such as interest and profits earned abroad) in the overall Balance of
Payments. Factors influencing a country's balance of trade include the strength or weakness of
its currency in relation to those of the countries with which it trades (a strong U.S. Dollar, for
example, makes goods produced in other countries relatively cheap for Americans), production
advantages in key manufacturing areas (Japanese automobiles, for instance), or the domestic
economy of a trading country where production may or may not be meeting demand.

On how not to counter the trade deficit

The thrust of our previous post was that mercantilist policies work, promoting economic
expansion in the country running the export surplus, to the enormous detriment of the industry
of the country running the trade deficit. This involves the exporting nation acquiring a surplus of
the importing country’s money. The rosy idea that the system of free trade cannot be exploited to
one country’s advantage is, on the face of it, absurd. No economic system has ever been developed
which has not been abused. History has shown, those countries which adopt an export oriented
posture prosper, those that do not decline. One may ask, why did the European powers prosper,
while their colonies remained stagnant or declined?(They still practice it, in the form of foreign
aid.) How did the Asian Tigers arise? Why does China prosper, while the US declines? Why is
Germany tasked with ‘rescuing’ Greece? The answer is always the same. One country runs a trade
surplus, while the other runs a deficit.

Warren Mosler, at
http://moslereconomics.com/2010/04/12/my-alternative-proposal-on-trade-with-china/
suggests, however, that we counter China’s policies simply by giving money to consumers
sufficient to overcome its effects, and create sufficient demand to sustain domestic industry, as
well as the excess in imports. He proposes a tax holiday, distribution of Federal money to the
states, and national service employment.
His proposals have other significant merits. However, his proposals will not change the
relationship between the Aggregate Supply curve provided by domestic industries, and the
augmented Aggregate Supply curve provided by the combination of domestic industries and
imports. The augmented Aggregate Supply curve will always be to the right, and the equilibrium
price level will always be less than the price level in the absence of imports.
The revenue received by domestic industry will thus on average, always be less than the cost of its
production, despite any overlay of inflation caused by giving money to consumers. Domestic
industries will be under persistent competitive disadvantage.

Compare with balanced trade, where only some industries experience competitive disadvantage,
but the others experience competitive advantage. The two even out, and the economy as a whole
is helped. ( Although there is increased 'creative' destruction, as the economy adjusts. Do the costs
of this balance with the benefits of trade? This seems to be just a transition state, however and in
the long term balanced free trade will be mutually beneficial.)

An influx of cash shifts the demand curve to the left. The Aggregate Supply curves for just
domestic production, or for balanced trade, and domestic production plus imports, do not
change. With imports, price moves down the AD curve to the AS curve for domestic production
plus imports, at the lower price. Solid lines. However, domestic revenue goes down the Aggregate
Supply curve to the new equilibrium point at both the reduced price and a reduced quantity, and
so is also reduced. Domestic industry, with reduced revenue, contracts. With an influx of cash, the
same phenomenon repeats itself, but just at a higher price level. Dotted lines. But see Redux.

A reminder that might be pointed out is that the problem with deflation is that in general it
reduces nominal profits and, at least in perfect competition, nominal costs are greater than
nominal revenues.

A comment: The Aggregate Supply curves in this diagram could be vertical, or curved, for those
who consider that an influx of cash is itself unlikely to cause an increase in production, but merely
cause an inflationary increase in the price level, at least in the long term. The basic argument is
the same. The country with deficit clearly declines both in quantity and price, and
certainly couldproduce more at higher price levels, having idled capacity. The country with
surplus is continually expanding, and its growing capacity must always outpace production.

POSTED BY GREG AT 9:12 AM

LABELS: TRADE DEFICIT MONEY SUPPLY MOSLER

Trade Deficit
In November of 2004, the United States ran a fifty-four billion dollar trade deficit, translating to over 600
billion for the entire year. This deficit is a result of the disparity between the amount of goods that the US
imports and the amount it exports. To equalize this deficit in its current account, the American government
sells assets from its capital account, often to foreign investors. This phenomenon is seen as a serious threat
to the success and continued growth of the nation's economy, tied in with popular concerns that the United
States is losing its competitive and dominant edge in global economics. The traditional economic theory
employed to solve this problem calls for a return to mercantile protectionism, through use of tariffs and
subsidies to drive up the price of imports and lower the price of exports. Running contrary to this is a
second option: increasing domestic savings and lowering government spending. These theories both aim to
decrease American dependence upon

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foreign imports and investment, and ultimately equalize the enormous trade deficit that
currently exists.
A nation that possesses strong industry, a favorable trade balance, and a lack of
dependency upon foreign states is optimum. This ideology is one that has been
strongly advocated throughout America's existence, by politicians from Alexander
Hamilton to Pat Buchanan. When a nation faces a trade deficit, it means that
competing states are producing more efficiently, and ultimately making profiting.
Also, a deficit means that industry and jobs, which could exist domestically, are
being "stolen" by foreign nations. According to mercantile policy, this is a zero-sum
game; when a competitor is winning, we are losing. The United States faces this
situation, having evolved from the world's largest creditor nation during and
following World War II to its current position as the world's largest debtor.
Because America imports much more than it exports, an additional 600 billion...

Advantages & Disadvantages Of International Trade

ADVANTAGES AND DISADVANTAGES OF INTERNATIONAL TRADE
International trade allows countries to exchange good and services with the use of money as a medium of
exchange. Several advantages can be identified with reference to international trade. However international
trade does have its limitations as well. Discussed below are both advantages and disadvantages of
international trade.

Advantages
• Greater variety of goods available for consumption – international trade brings in different varieties of a
particular product from different destinations. This gives consumers a wider array of choices which will not
only improve their quality of life but as a whole it will help the country grow.

• Efficient allocation and better utilization of resources since countries tend to produce goods in which they
have a comparative advantage. When countries produce through comparative advantage, wasteful
duplication of resources is prevented. It helps save the environment from harmful gases being leaked

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into the atmosphere and also provides countries with a better marketing power.

• Promotes efficiency in production as countries will try to adopt better methods of production to keep costs
down in order to remain competitive. Countries that can produce a product at the lowest possible cost will be
able to gain a larger share in the market. Therefore an incentive to produce efficiently arises. This will help
standards of the product to increase and consumers will have a good quality product to consume.

• More employment could be generated as the market for the countries’ goods widens through trade.
International trade helps generate more employment through the establishment of newer industries to cater
to the demands of various countries. This will help countries bring down their unemployment rates.

Disadvantages
• It could lead to a more rapid depletion of exhaustible natural resources. As countries begin to up their
production levels, natural resources tend to get...