, ,

There is a lot that is misunderstood about trade and deficits. I find it sometimes dizzying. Who is right? Who can simplify it for me?

Walter Williams, a great economist, does a great job of helping me understand.

Here is what happens: When I purchase $100 worth of groceries, my goods account (groceries) rises, but my capital account (money) falls by $100. For my grocer, it is the opposite. His goods account falls by $100, but his capital account rises by $100. Looking at only the goods account, we would see trade deficits, but if we included the capital accounts, we would see a trade balance. That is true whether we are talking about domestic trade or we are talking about foreign trade.

Source: Trade Deficit Angst – Walter E. Williams – Page full