International trade deficit, Balance of trade deficit

Trade deficit is a situation when in an economy the imports are more than the exports. In such as case the economy is highly dependent on the import of goods. There are various factors for the trade deficit, such as the country’s inability to produce goods and services, as per the needs of the country, failure of agricultural produce due to natural calamities, etc.

Trade deficit is a situation when in an economy the imports are more than the exports. In such as case the economy is highly dependent on the import of goods. There are various factors for the trade deficit, such as the country’s inability to produce goods and services, as per the needs of the country, failure of agricultural produce due to natural calamities, etc.

As per the Ricardian theory of comparative advantage, benefits of trade are related to the opportunity cost of production. A country that has no advantage in any product can still be profited by concentrating on the export of the goods that have the lowest opportunity cost of production.

Some economists are of the view that trade deficits are harmful for the economy of the country. Increased imports and less domestic production in a country slowly brings down the employment and in turn the gross domestic products also comes down.

The country is devoid of infrastructure development as the imports draw out money from the financial system of the economy. The rate of economic growth decreases with the increase in the trade deficit. Problems like high national debt, high mortgage debt, high external debts increase due to trade deficits and stagflation creeps into the economy.

Milton Friedman, regarded as the father of Monetarism, on the other hand argues trade deficit as many fear, is not that critical. It is rather an attempt to drive the macroeconomic strategies that are favorable for exporting industries.

In his opinion the trade deficits are not critical as the money drawn out by imports always come back to the country of its origin in some form or the other. He says that even the worst situation of the money never coming back to the country can be the best possible result, as it would be same as an exporting country not using the revenue it has earned or never returning it for circulation in the market.

But again there is problem with this theory. Friedman’s argument is proven in the short run but not in the long run. The theory says that the trade deficit, as good as debt, is not a problem at all as the debt has to be paid back. In the long run, as per this theory, the accumulation of a major debt is quite difficult to pay off. Economists in support for Friedman’s theory suggest that when the money drawn out returns to the trade deficit country, the growing demand would make the exchange rate better.