Site icon Herold Financial Dictionary

Trade Deficit

Trade deficits are unfavorable balances of trade. With a trade deficit, a greater valued amount of goods and services are being imported than are simultaneously being exported. This stands in contrast to trade surpluses that occur when a larger amount of goods and services are exported by a nation than are imported in return. Trade deficits are also called trade gaps.

These trade deficits and trade surpluses are a part of the balance of trade, or net exports, which proves to be the total difference between imports’ and exports’ tangible value within a country’s economy during a particular time frame. The balance of trade results from the relationship of the country’s exports and imports.

Economists have held varying opinions on how negative or non important that trade deficits might be. Some have said that issuing paper money not backed by anything other than faith and credit of a government in exchange for valuable produced goods is not a bad thing. Professor Milton Freedom, the founder of monetarism, is one of the main proponents of this particular point of view. He felt that what would likely happen is that high exports would raise the U.S. currency value, while high imports would lower the U.S. dollar value.

Friedeman said that the worst case scenario for running trade imbalances would be that easily and inexpensively printed U.S. dollars would leave the country in order to pay for the excess imports versus exports. Friedman claimed that this produced the same result as if the country that earned the dollars through exports simply set them on fire and did not send them back to America. His policies became influential in the late 1970’s and early years of the 1980’s.

Other influential investors and businessmen have made opposite arguments. Warren Buffet is perhaps the greatest investor in American history. He claims that the constant U.S. trade deficit proves to be the biggest financial threat facing the national economy. He says that it is worse than the enormous annual national budget deficit and consumer debt levels together.

Buffet has said that other countries in the world own three trillion dollars more of America than we own of their countries. This investment imbalance has only increased since Buffet made these arguments nearly five years ago. Buffet and his followers are so worried about the imbalanced trade deficit that they have suggested instituting import certificates as an answer to the American problem and to bring balanced trade back to the country.

Exit mobile version