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Is a trade deficit an advantage?

how can trade deficit be an advantage to any country. please give details with the help of examples in both positive and negative way.

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  • 1 decade ago
    Favorite Answer

    No. A trade deficit is not an advantage.

    The question is just how big a disadvantage it is and there is significant disagreement about this between domestic and international economists.

    http://books.google.com/books?id=CbJrm29W4y4C&pg=P...

    http://delong.typepad.com/sdj/2005/11/divergent_vi...

    (You can get a free copy of the paper or read it in "The Economists' Voice" edited by Stiglitz, Edlin, and DeLong.)

    The bottom line is that in the long run, a significant trade deficit should cause the value of the currency to decline. If it declines slowly, no big deal - the economy adapts: exports rise and imports fall to bring trade in balance. If it happens suddenly, then you end up with significant dislocations - a financial crisis, people out of work, etc. - just because it takes time to adapt.

    On that, everyone agrees. But on the question of whether the drop will be sudden or slow, there is disagreement. Some argue that the central bank can take steps to make the decline gradual. Others note that it can, but in the past has not because it has focused on inflation rates rather than unemployment rates. Etc.

    With respect to the U.S., the market seems to think that the dollar will drop slowly:

    http://www.project-syndicate.org/commentary/delong...

    but that doesn't mean they are right, or that the same would happen with other countries.

    Then there is the issue that a part of the current U.S. trade deficit is due to China's export subsidies in the form of an unreasonably low value for the yuan. This is definitely hurting everyone:

    http://krugman.blogs.nytimes.com/2009/12/31/macroe...

    And there is the U.S. government deliberately making the trade deficit worse by subsidizing off-shoring:

    http://www.exponentialimprovement.com/cms/offshore...

  • ?
    Lv 4
    4 years ago

    Disadvantages Of Trade Deficit

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