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Trade Deficits and Trade Surpluses: Their Effect to Economy

Many individuals believe that trade deficits are a troubling economic condition which indicates weakness in an economy while trade surpluses are a sign of strength and rising prominence for an economy.

Where do you stand on this subject? Do you agree or disagree and why?

Solution Preview

It is indeed an alarming conviction that people quickly misunderstand that trade deficits is a sign of a weak economy and trade surpluses means economic strength. Many articles have been written covering this topic and when people read them quick, misunderstandings occur on the real implications of these trade imbalances. According to Suranovic, (1999) one of the reasons for this is the terminology. Oftentimes, deficit sounds bad, e.g., in business, deficit means negative because it means more loss than gain. In contrast, surplus sounds good as it means having profit. Well, accountants need to balance figures as this is their goal. Another misunderstanding can occur is when people feel that they are buying more of the goods of the foreigners, and foreigners are unwilling to buy as much as they are buying, they feel a sense of unfairness or injustice. People should understand that the country's balance of payments is always balance and even if there is a trade deficit, there are still no unequal exchanges. Another reason for the misunderstanding is that in some situations trade deficits are bad for some countries while surpluses have benefited other countries.

These misunderstandings should not be evidences that a country with a trade deficit is in a dangerous economic ...

Solution Summary

The solution discusses one's stand on whether or not trade deficits worsen economic condition and trade surpluses are a sign of strength for a country's economy. References included.