3.4. Milton Freidman on Trade Deficit
In the 1980s, Milton Friedman who was a Nobel Prize winning Economist, a Professor and the Father of Monetarism contended that some of the concerns of Trade Deficit are unfair criticisms in an attempt to push macro- Economic policies favourable to exporting industries.
He further argued that Trade Deficit are not necessarily as important as high exports raise the value of currency, reducing aforementioned exports, and vice versa in imports, thus naturally removing Trade Deficits not due to investment.
This position is a more refined version of the theorem first discovered by David Hume, where he argued that England could not permanently gain from exports, because hoarding gold would make gold more plentiful in England; therefore the price of English goods will soar, making them less attractive exports and making foreign goods more attractive imports. In this way, countries Trade balance would balance out.
Friedman believed that Deficits would be corrected by free markets as floating currency rates rise or fall with time to discourage imports in favour of the exports. Revising again in the favour of imports as the currency gains strength.
But again there were short comings on the view of Friedman as many economists argued that his arguments were feasible in a short run and not in a long run. The theory says that the Trade Deficit, as good as debt, is not a problem at all as the debt has to be paid back. They further argued that In the long run as per this theory, the consistent accumulation of a major debt could pose a problem as it may be quite difficult to pay offset the debt easily.
Economists in support for Friedman suggested that when the money drawn out returns to the Trade Deficit Country