Tuesday, May 04, 2004

Balance of trade

This graph does show the US trade balance from 1970 to 2000. What is striking is that the graph is almost all of the years in the negative. How can that be, everyone know that a negative trade balance is bad, there is obviously something wrong with this picture. What is wrong is the understanding of what balance of trade is. It is deceptive to think that negative trade balance is something negative. This is only natural, since most often a word has only one particular meaning.

International trade balance is a national accounting phenomenon, and as such can be quite deceptive. Most importantly it only accounts for physical goods and does not include services. Also it counts foreign investment as dept. This means that software and other non-physical goods are not in the equation.

The trade balance is a number that is based on innumerable number of trades. For example if someone buys a new car from abroad, the balance 'worsens' but of course the trade is beneficial for both parties. The seller gains, say, $20.000 and the buyer gains a new car. Most often deals like this go as planned and both parties are happy.

Of course the buyer of the car has not done any damage to his country, although he has armed a politician with a lethal weapon, namely the 'trade balance has increased' exclamation that the opposition uses a lot in the times of plenty.

Think things.

The only bad trade deficit is the part that is created by deals that do not make sense from economical standpoint, such as many government projects.

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