A Brief Introduction to Trade Economics

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The Wall Street Journal – Alan S. Blinder 

Published: July 8th 2018

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Rating: 3 out of 5.

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Rating: 2 out of 5.

Preview

This article is an opinion piece by a well respected economist, discussing the concept of international trade, and why running a budget deficit is not always a bad thing, rather a necessary one. The author is critical of viewpoints shared by the 2018 president of the United States.

Author

 

Alan S. Blinder is a well respected, award winning American economist. He is a professor at Princeton University, and does regular work as a columnist for The Wall Street Journal. Previously, he served as Vice Chairman of the Board of Governors of the Federal Reserve System under president Bill Clinton. Blinder has produced a vast body of works on various economic topics, and has a Ph.d. from the Massachusetts Institute of Technology

Sources

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Analysis of Potential Bias

This article serves as an opinion piece, and therefore does carry some bias. Blinder
tends to take more democratic opinions on issues, and has been openly critical of former President Donald Trump on more than one occasion.

Article Decryption

Despite some common misconceptions, a budget deficit is not always a bad thing, particularly when looking at bilateral, or multilateral trade. All nations that participate in international trade will benefit (with the important caveat that not every person within a nation benefits), and when more than two countries engage in trade it is perfectly normal to see trade deficits and surpluses. Additionally, if a country invests more than it saves, such as in the United States, a significant multilateral deficit will be present. There are three important truths of international trade that contribute to the above conclusions;

  1. Bilateral surpluses and deficits are normal
  2. In countries where citizens spend rather than save, a country may need to turn to foreigners to finance investments for the future
  3. The principle of comparative advantage must be considered.

You may consider the bilateral surpluses and deficits an individual runs in daily life. A personal trade surplus is present with the organization you work for as you likely only receive gains from your employer and spend little there. Meanwhile, a personal trade deficit is present where you spend your money, such as on food or rent as you will not likely receive income from your landlord or grocery store. These are surpluses and deficits in bilateral trade flows.


Secondly, in the United States, citizens do not save very much, and thus the government runs persistent deficits. For the US to have the funding to invest in the future, it must attract foreign investors who will purchase paper assets, usually in amounts equal to a country’s trade deficits. The alternative to this is for a country to not invest in its future, but this would be a poor decision. The ability to borrow is an important tool for the future of a country, however, it will result in trade deficits.

Finally, comparative advantage is a crucial concept for all forms of trade. Economies can become more efficient with specialization according to comparative advantage; even if you as an individual or country are better at producing everything, you should specialize in the task with a more significant advantage, and leave the other tasks to those with lower opportunity cost for it. Comparative advantage is one of the primary reasons China specializes in manufacturing. They can manufacture items far more efficiently than other nations. This should not make China’s unfair trade practices acceptable but those are due to issues with intellectual property rights and not bilateral trade issues.

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