In Defense of Econ 101

People sometimes dismiss basic economic reasoning, “that’s just Econ 101!” yet most policymakers couldn’t pass the exam. Here’s an apropos bit from our excellent textbook, Modern Principles of Economics.

Do you shop at Giant, Safeway, or the Piggly Wiggly? If you do, you run a trade deficit with those stores. That is, you buy more goods from them than they buy from you (unless, of course, you work at one of these stores or sell them goods from your farm). The authors of this book also run a trade deficit with supermarkets. In fact, we have been running a trade deficit with Whole Foods for many years. Is our Whole Foods deficit a problem?

Our deficit with Whole Foods isn’t a problem because it’s balanced with a trade surplus with someone else. Who? You, the students, whether we teach you or whether you have bought our book. You buy more goods from us than we buy from you. We export education to you, but we do not import your goods and services. In short, we run a trade deficit with Whole Foods but a trade surplus with our students. In fact, it is only because we run a trade surplus with you that we can run a trade deficit with Whole Foods. Thanks!

The lesson is simple. Trade deficits and surpluses are to be found everywhere. Taken alone, the fact that the United States has a trade deficit with one country is not special cause for worry. Trade across countries is very much like trade across individuals. Not every person or every country can run a trade surplus all the time. Suddenly, a trade deficit does not seem so troublesome, even though the word “deficit” makes it sound like a problem or an economic shortcoming.

We continue on to discuss ” What if the United States runs a trade deficit not just with China or Japan or Mexico but with the world as a whole, as indeed it does? Is that a bad thing?”

Here’s a good Noah Smith piece if you want the details.