Monday, December 23, 2019

The Effect of Trade Balance on National Income Growth

INTRODUCTION BACKGROUND OF THE STUDY The attainment of balance of trade is always a critical factor in the economic development of many nations. This simply means that continuous trade deficits and surpluses are undesirable. The world has become a global village in which different countries interact with themselves and get involved in business transactions and trade. This kind of trade between countries is known as international trade which involves the exchange of goods and services between nations. Some countries are more or less deficit nations which mean they import more than they export, while some countries produce more than is absorbed by their domestic economy so they export the surpluses. Either of these actions means that a†¦show more content†¦He proposed as an example to suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit. He supposed he was in France, and sent a Cask of wine which was worth 50 francs to England. The custom house would record an export of 50 francs. If in England, the wine sold for 70 francs, which he then used to buy coal, which he imported into France and was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the custom house would say that the value of imports exceeded the value of exports and was trade deficit against the ledger of France. By reductio ad absurdum, Bastiat argued that the national trade deficit was an indicator of a successful economy, rather than a failing one. Bastiat predicted that a successful, growing economy would result in greater trade deficits, and an unsuccessful, shrinking economy would result in lower trade deficits. This was later, in the 20th century, affirmed by economist Milton Friedman. Trade deficits can be healthy if it is used in importing capital goods that increases output. Small trade deficits are generally not considered to be harmful to either the importing or exporting economy. 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