“The uninformed buys into the mercantilist creed that trade deficits are bad and trade surpluses are good… ”

Trade deficit harangues are a favorite of politicians mongering fear for votes. They pin a country’s economic woes on an idea that seems to make sense at first glance.

Economist Walter Williams (quoted above) uses a simple analogy to set the record straight…

I buy more from my grocer than he buys from me. That means I have a trade deficit with my grocer. My grocer buys more from his wholesaler than his wholesaler buys from him. But there is really no trade imbalance, whether my grocer is down the street, in Canada or, God forbid, in China.

Here is what happens: When I purchase $100 worth of groceries, my goods account (groceries) rises, but my capital account (money) falls by $100. For my grocer, it is the opposite. His goods account falls by $100, but his capital account rises by $100. Looking at only the goods account, we would see trade deficits, but if we included the capital accounts, we would see a trade balance. That is true whether we are talking about domestic trade or we are talking about foreign trade.

Williams dispatches with the trade deficit “boogeyman” in his brief full article right here.