Why Is the Trade Deficit Important? | The Business Desk with Paul Solman | PBS NewsHour

ABOUT US \| LOCAL TV LISTINGS EMAIL PRINT

REGION: North America

TOPIC: Business & Economy

PBS NewsHour

In the fall of 2007, when the U.S. economy first seemed in peril, I began answering reader queries here on the Business Desk. I still do so, but this page has expanded to include posts from eminent economists, "far-flung correspondents," and a variety of voices that have intriguing and/or useful things to say about economics, broadly defined. Please feel encouraged to respond to any and all of them.

« Previous Entry | Main | Next Entry »

Why Is the Trade Deficit Important?

Name: Amy Shacklett
City & State: Knoxville, Tenn.

container ship; andrew.albertson via Flickr

Question: Please explain the trade deficit. What is it? Why is it important? Is it an indicator like taking someone's temperature or is it a debt that has to be paid?

Does it relate directly to our national debt? For example, we have a trade deficit with China. Also, we borrow money from China by selling T-Bills. The T-Bill transactions contribute to our national deficit. How does the trade deficit fit into the picture?

Paul Solman: Trading with those outside the United States means selling to them and buying from them. When we spend more abroad than we earn from abroad, THAT is a trade deficit.

Why is it important? Because the money has to come from somewhere and for years, we've been borrowing it.

Does it relate to our national debt? Yes, by a slightly circuitous route. When we spend more abroad than we earn, the rest of the world has more of our dollars than we have of their currencies, right? What do they DO with our dollars? They can buy ASSETS in America like the Japanese used to: Rockefeller Center, the Pebble Beach golf course, Columbia Pictures. They can buy U.S. stocks. And/or they can LEND us back the dollars, for which they get - to use 'Guys and Dolls' terminology - our "marker": our Treasury bills, notes, and bonds - our IOUs.

And why does the Treasury need to issue IOUs? To cover our annual deficit, of course, because the government TOO spends more than it earns. Which means that it doesn't tax us as much as it should. Which means that we have the extra money to buy more stuff from abroad. It also means that our cumulative national debt grows.

So here's the great daisy chain of being American: We buy more from abroad than we sell. Foreigners - most notably the Chinese in recent years - take our excess dollars and lend them back to us via the government, which can spend more than it earns, which lets us keep our tax money, which we then can the spend abroad.

We paved this trail with Japan in the 1980s. China has simply been following suit.

-- Posted March 30, 2009 | Comments ( ) | Permalink

TrackBacks

Listed below are links to blogs that reference this entry: Why Is the Trade Deficit Important?.

TrackBack URL for this entry: http://www.pbs.org/newshour/mt4/mt-tb.cgi/1178

Comments

container ship; andrew.albertson via Flickr

**Question:** Please explain the trade deficit. What is it? Why is it important? Is it an indicator like taking someone's temperature or is it a debt that has to be paid? Does it relate directly to our national debt? For example, we have a trade deficit with China. Also, we borrow money from China by selling T-Bills. The T-Bill transactions contribute to our national deficit. How does the trade deficit fit into the picture? **Paul Solman:** Trading with those outside the United States means selling to them and buying from them. When we spend more abroad than we earn from abroad, THAT is a trade deficit. Why is it important? Because the money has to come from somewhere and for years, we've been borrowing it. Does it relate to our national debt? Yes, by a slightly circuitous route. When we spend more abroad than we earn, the rest of the world has more of our dollars than we have of their currencies, right? What do they DO with our dollars? They can buy ASSETS in America like the Japanese used to: Rockefeller Center, the Pebble Beach golf course, Columbia Pictures. They can buy U.S. stocks. And/or they can LEND us back the dollars, for which they get - to use 'Guys and Dolls' terminology - our "marker": our Treasury bills, notes, and bonds - our IOUs. And why does the Treasury need to issue IOUs? To cover our annual deficit, of course, because the government TOO spends more than it earns. Which means that it doesn't tax us as much as it should. Which means that we have the extra money to buy more stuff from abroad. It also means that our cumulative national debt grows. So here's the great daisy chain of being American: We buy more from abroad than we sell. Foreigners - most notably the Chinese in recent years - take our excess dollars and lend them back to us via the government, which can spend more than it earns, which lets us keep our tax money, which we then can the spend abroad. We paved this trail with Japan in the 1980s. China has simply been following suit.