Thursday, July 05, 2007


Professor Greg Mankiw soundly describes why bilateral trade deficits between trading partners are irrelevant. The overall balance of trade links nation's saving and investment but bilaterally, this is not true. For example, Slovenia can have huge deficits with some of its trading partners, say Austria, despite possibly having a balanced trade overall, which is the one that matters. Bilateral deficits between trading partners frequently occur in foreign policy issues as much of the attention is drawn to statistics when economic transactions between two trading partners are calculated on the permanent basis.

From an everyday point of you, we have many deficits. For instance, my own trade balance is the difference between my income and my spending, but why should I be concerned if I'm in a huge trade deficit with a particular firm? If I buy a laptop worth $950 from Dell, the transaction is made voluntarily as both sides benefited. I got a laptop I paid for, and Dell increased the market sales.

For example, I can go to H&M where I buy clothes and I'm a deep and chronic deficit with the firm, since H&M does not buy a darned thing from me. But I live with my own means and I get casual clothes I paid for.

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