Trade Deficits Advantage
George Alessandria, Senior Economist for the Philadelphia Federal Reserve explains Trade Deficits also indicate an efficient allocation of Resources: Shifting the production of goods and services to China allows U.S businesses to allocate more money towards its core competences, such as research and development. Debt also allows countries to take on more ambitious undertakings and take greater risks. Though the U.S no longer produces and export as many goods and services, the nations remains one of the most innovative. For Example, Apple can pay its workers more money to develop the Best Selling, Cutting Edge Products because it outsources the production of goods to countries overseas.
In this chapter, efforts were made to explain some of the issues concerning balance of Trade and trying to X-ray some of the arguments in favour of Trade balances and imbalances with a view to finding answers to some salient questions and making for proper understanding of the concept of Trade balances Surplus and Deficit which is fast becoming a major problem in the world’s Economy today which scholars like John Maynard Keynes earlier predicted.
In a bid to finding a solution to this, we shall be discussing from the following sub-headings;
(a). Conditions where Trade imbalances may be problematic.
(b). Conditions where Trade imbalances may not be problematic.
2.1. Conditions where Trade imbalances may be problematic
Those who ignore the effects of long run Trade Deficits may be confusing David Ricardo’s principle of comparative advantage with Adam Smith’s principle of absolute advantage, specifically ignoring the latter. The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo do not hold where the factors of production are internationally mobile. Global labor arbitrage, a phenomenon described by economist Stephen S. Roach, where one Country exploits the cheap labor of another, would be a case of absolute advantage that is not mutually beneficial. Since the stagflation of the 1970s, the U.S. Economy has been characterized by slower GDP growth. In 1985, the U.S. began its growing Trade Deficit with China. Over the long run, nations with Trade Surpluses tend also to have a savings Surplus. The U.S. generally has lower savings rates than its Trading partners, which tend to have Trade Surpluses. Germany, France, Japan, and Canada have maintained higher savings rates than the U.S. over the long run.