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An Analysis of Surplus and Deficit

Politicians constantly push trade tariffs and exchange rate controls, both of which are targeted at, and affect, international trade. The effect of these controls ultimately resound through domestic economies. Is NX < 0 a bad thing? Not necessarily.

When exports are greater than imports, there is a trade surplus
When imports are greater than exports, there is a trade deficit

Are trade surpluses better than deficits? We do know that politicians, who aren't economists, tend to pump up rhetoric that deficits are always bad and we're on the road to ruin as a result.

If it were only that easy.

Here's an example to help you along.

Joe has $100 in cash
Bill has $100 in cash

Joe grows bananas and sells them for $1.00 each. He has 50 bananas
Bill grows pomegranates and sells them for $1.00 each. He has 50 pomegranates

Joe likes Bill's pomegranates
Bill likes Joe's bananas

Joe buys 20 pomegranates from Bill for $20.00
Bill buys 30 bananas from Joe for $30.00

What just happened?
If Joe and Bill were sovereign nations......
Joe has exported 30 bananas and imported 20 pomegranates.
Bill has exported 20 pomegranates and imported 30 bananas

Joe is now running a trade surplus of $10.00 and Bill is running a trade deficit of $10.00. So is Bill in a worse position than Joe? Of course not and to suggest that either is poorer because of their non-equal trading is a ridiculous oversimplification.

Both men started with $150 of worth in the form of $100.00 in cash and $50.00 worth of product. After their trade, they still have $150 of worth.
Their individual ratios of cash and product are different slightly but it's still $150.00 of worth.

What they both have more of is happiness. Joe and Bill trade voluntarily and best of all they have happiness. Joe is happy buying Bill's pomegranates and Bill enjoys Joe's bananas.

To focus merely on a surplus or deficit number completely misses the point regarding trade. All Joe and Bill did was rearrange their assets.

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This page contains a single entry from the blog posted on December 21, 2008 12:41 PM.

The previous post in this blog was Deconstructing the GDP - Net Exports.

The next post in this blog is The Global Economic Collapse Part 1: The Beginning.

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