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When we hear the phrase "trade deficit" we all start to go into panic mode, but is a trade deficit necessarily bad? We were talking about this in my business class and I just read it in my macroeconomics book and it got me to thinking.
I'll use the example I heard in class:
Let's say you have $50,000 and you wanted to buy a new car. You see that the German built Mercedes SLK350 is your dream car. So you go over to the Germans and say "Hey, I want to buy that car." You have $50,000 and they operate on Euros. So you go over to a bank in Germany and say "I need Euros to buy that car." For simplicity, let's say that the exchange rate is 1:1. So you get 50,000EUR. The bank has the $50,000. You go back to the dealer and purchase the car for 50,000EUR. You're happy because you have the car and the dealer is happy because he has the 50,000EUR. What about the banker? Let's say that he wants to invest in a corporation. He can't invest in a German company because he has US Dollars and not Euros. So the banker decides to invest in an American company. So, you're happy, the dealer is happy, the banker is happy because he can use his dollars, and the American corporation is happy because it has an additional $50,000 investment. The $50,000 comes back to the shores of America.
So I ask you again, is a trade deficit necessarily bad?
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Comments
The banker didn't get his original 50,000 Euros out of nowhere - he got them because the Germans bought American dollars which translates into taking on American debt.
So you end up owning the car and the Germans end up owning the bank.
Posted by: Mello at February 20, 2006 11:34 PM
It depends on what the banker did or even if he was in America. If it was an American banker he could have purchased 50,000EUR. My point is that a trade deficit is not necessarily a bad thing. Check this article out from Townhall.com:
http://www.townhall.com/opinion/columns/walterwilliams/2005/05/25/15524.html
Posted by: Nathan at February 21, 2006 02:29 PM
So basically Dr. Williams is saying that yes, we get their stuff and they own our bank. He has some reasons why he thinks that's ok. Basically he says that we couldn't get further into debt unless they financed it, and it should be a source of pride that they trust us and our currency.
That would be just great if currency had any real value (that is if it was backed by anything).
Posted by: Mello at February 21, 2006 07:45 PM
Yes, I know that our currency has no real backing to it, but other countries trust our currency more than a country that is constantly in turmoil (pick any African or Central/South American nation). We have debt that is exorbantly large, but guess what...we own other countries debts too. It's not like America is the only country that has a debt. I'm sure that you understand that.
One point I failed to mention, we have a trade deficit also because our currency is very powerful (as we all know). It's cheaper to import stuff made in another country who has a cheaper opportunity cost than it is to make it here. So a stronger currency and you'll have a trade deficit, a weaker currency and you'll have a trade surplus...you can't have both.
Posted by: Nathan at February 22, 2006 10:49 AM
Do you think that our currency will always be as powerful as it is? If no, what do you think will happen when it drops? If yes, what are your reasons for this?
Posted by: Mello at February 22, 2006 02:56 PM
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