Trade Defecit
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The United States has on average possessed a global trade deficit since 1968 (Scott, 2002). Trade deficit is “the situation when a countrys imports of goods and services are greater than its exports” (Gwartney, Stroup, Sobel and Macpherson, p.209). Conversely, a situation where exports of goods and services are greater than imports is referred to as a trade surplus. There are differing opinions amongst economists on the desire and magnitude in which a country should strive toward a trade surplus, deficit, or neutral situation. This is due in no small part to various economic ideals; classical vs. modern philosophies, absolute vs. competitive advantages, levels of regulation, personal savings vs. credit, and acceptable unemployment rates are but a few considerations. As for the layperson, comprehension is limited, in no small part, by attempting to relate macro concerns to micro situations they are more familiar with. It is my opinion that a trade deficit is desired as opposed to a trade surplus.
Consider the following micro example. Mark installs flooring. Luke pays Mark -after cost – $330 to install carpet in his house. Other than this transaction, the two do not interact; Luke provides no product or service for Mark. Mark is very good at his job. He has a great reputation and was not the lowest bidder. The lowest bidder was $300. Therefore, assume Mark now has a budget surplus with respect to Luke for $30. Later that week, Marks wife goes to the market to buy fish. Even though John is not the cheapest, Mrs. Mark highly values the establishments innovative customer service and Christian environment. She, therefore, spends a total of $30 more than she would have had she bought the respective amount of fish sticks at Piggly Wiggly. The Mark family is now in a $30 budget deficit with John. Foregoing quality and other factors that feed ones marginal utility, one may insist on buying fish sticks in lieu of fresh fish in order to stay out of deficit. Finally, as we all know, Luke is a highly educated doctor. Earlier that week, he gave Johns son stiches due to a fishing injury. His bill was $30 above insurance coverage (it is a very small town.) This is essentially a circular economy. If Mark never bought the fish from John, and John never paid Luke for the stiches, Luke wouldnt have been able to afford new flooring. All three used their competitive advantage to attain an – at minimum – zero sum end. However, due to intangibles such as education, innovation, and reputation an economical win-win situation was possible. One pays another more because he perceived more marginal utility due to those intangibles.
Economist Milton Friedman stated his belief that trade deficits are not necessarily harmful to an 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” (Wikipedia, 2012.) As with the given micro example, it is in worst case a zero sum game. Alternatively, businessperson and investor Warren Buffet stated “”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.” (Associated Press, 2006.) Milton tells us to buy the fresh fish while Warren says buy the sticks. Is it more acceptable to disagree with a Nobel Prize winner or Tycoon?
Unlike Matt, Luke, and John, varying global economies do not play by the same rules.