Thursday, May 26, 2005

Walter Williams Explains the Trade Deficit

When it comes to explaining "economics for the masses", there are few better than Walter Williams. He has a rare gift of making things (as Einstein said) "as simple as possible, but no simpler". In this column at, he does his usual great job and explains the trade deficit:
I buy more from my grocer than he buys from me, and I bet it's the same with you and your grocer. That means we have a trade deficit with our grocers. Does our perpetual grocer trade deficit portend doom? If we heeded some pundits and politicians who are talking about our national trade deficit, we might think so. But do we have a trade deficit in the first place? Let's look at it.

Insofar as the grocer example, there are two accounts that I hold. One is my "goods" account, which consists of groceries. The other is my "capital" account, which consists of money. Let's look at what happens when I purchase groceries. Say I purchase $100 worth of groceries. The value of my goods account rises by $100. That rise is matched by an equal $100 decline in my capital account. Adding a plus $100 to a minus $100 yields a perfect trade balance. That transaction, from my grocer's point of view, results in his goods account falling by $100, but when he accepts my cash, his capital account rises by $100, again a trade balance...
Click here for the enire column, and thanks to Don Boudreaux at Cafe Hayek for the link.

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