Wednesday, December 14, 2005

Don't Worry, Buy Imports

The news seems to have an infatuation with listing the latest data on the so-called trade deficit that we run with other countries, saying that "The U.S. trade deficit widened unexpectedly in October to a record $68.9 billion despite a drop in the cost of imported oil, as the deficits with China, Canada, the European Union, Mexico and OPEC all hit records, government data showed Wednesday." To set the record straight, there is no trade deficit. As I've explained before, trade with other countries is good.

Suppose you sell me a watch. I give you $20 and you give me a watch. My cash account dropped by $20, but my goods account increased by a value that I perceive to be greater than $20. (Were it an “even” exchange, I would have been indifferent between the watch and my $20 bill). To you, the $20 was worth more than the watch, so while your goods account dropped by some amount that you perceive to be less than $20, but your cash account increased by $20. Neither of us owes each other any additional amount and both of us are better off. There is no “trade deficit.”

I could have knitted the sweater I’m wearing today. But I didn’t. Someone living across the world did. Should I be concerned that some portion of my wealth went to the person who knitted my sweater? Should I be worried about my “trade deficit” with someone because they reside in another country? Of course not. Obviously I believe the person earned it and I am better off, or I would not have made the purchase in the first place.

Don't worry - buy the Swiss watch, the French wine, the Japanese car. You're not creating a "trade deficit."

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