Commercial Deficits, Good or Bad?

If the exports exceed the imports in a country, the country will have a commercial surplus, however if the imports exceed the exports in a country, the country will have a commercial deficit. Unfortunately the words surplus and deficit have very strong connotations that lead people to believe that a surplus is definitely better than a deficit. However, this is not actually so, but you cannot reduce it from the rhetoric that the politicians use, which always makes the deficits look bad and makes people believe that it brings about disastrous situations.

To understand why politicians are wrong (it does not actually take much to understand why they are wrong, but in this specific aspect...) consider the example of two people that would like to commercialize. Lets say that both of these people start out with $100 in cash and each one produces a good to sale. The first one decides to cultivate lemons and sells each at $1.  The second fellow decides to cultivate carrots and sells each at $1. Lets say that each one produces 50 units of the vegetables.

Lets imagine now that the guy that cultivated lemons likes carrots and wants to buy thirty for $30, and the guy that cultivates carrots wants to buy twenty lemons for $20. Each is interested in letting the other have what he wants so they do the swap and the lemon cultivator buys thirty carrots while the carrot cultivator buys twenty lemons.

These types of exchanges are nothing to be concerned about and should not alarm anyone, but when the people start to look at them using the terms commercial surplus and commercial deficit, they often times come to the conclusion that only one of them has benefited from the exchange, when actually, each one was doing what they wanted to do in the first place.

In order to see where the confusion comes from, you can observe in the vocabulary of international trade, the cultivator of carrots only exports a value of $20 in lemons but imports a higher value of $30 in carrots. At the same time, the lemon cultivator exports a value of $30 in carrots but only imports a value of $20 in lemons. As a result you have a situation in which the lemon cultivator has a commercial deficit of $10 and the carrot cultivator has a commercial surplus of $10.

So, does this mean that the lemon cultivator is in a worse situation than the carrot cultivator? It actually doesn’t. Each one of them had things for a value of $150: their $100 in cash and $50 in vegetables. When all is done and the swap has been done, both of them still end up having things that have a value of $150. The lemon cultivator has $90 in cash plus the value of $30 in lemons and another of $30 in carrots. The carrot cultivator has $110 in cash plus a value of $20 in carrots and another of $20 in lemons.

Affirming that the swap has made one of the individuals become poor is a monumental error. In fact, both are more content with the disposition of their assets after the exchange because these were voluntary exchanges. If the lemon cultivator had been happier with his initial value of $100 in cash and $50 in lemons, he would not have done the exchange to get carrots. And the same is true in the case of the carrot cultivator.

While international trade may be voluntary, all the interchanges increase contentment. Focusing on the existence of a deficit or a surplus, is not fully understanding that international trade is simply a reordering of assets between countries that makes each more content. Even the country that has a trade deficit is happier in this type of case.  

Beginner Money Investing International Commerce Affects the Economy Commercial Deficits, Good or Bad? A Look at Assets The Comparative Advantage