We often hear that trade deficits are bad for a country. Do you agree or disagree with this viewpoint? Explain carefully.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: Having a deficit on the goods and services balance (also called trade balance) means that a country imported more goods and services than it exported. A trade deficit might be considered bad for a country since it indicates that the country consumes more foreign goods than it exports. This might be an indicator that the economy is not able to produce the goods and services that its citizens consume. However, the goods and services balance is only part of the current account balance. It might be the case that a country is running a trade deficit but has a balanced current account. The current account also contains international income flows (income received from foreigners and income paid to foreigners). If the citizens of a country hold financial assets abroad, then the returns on these financial assets could be used to buy foreign goods. That way the country is not more indebted even if it has a deficit on the trade balance. This suggests that a deficit on the current account should be a bigger concern than a deficit on the trade balance.