Quoting from wikipedia:

> Prior to 20th-century monetarist theory, the 19th-century economist and philosopher Frédéric Bastiat expressed the idea that trade deficits actually were a manifestation of profit, rather than a loss. 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 customhouse would record an export of 50 francs.

> If in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France (the customhouse would record an import of 70 francs), and was found to be worth 90 francs in France, he would have made a profit of 40 francs.

> But the customhouse would say that the value of imports exceeded that of exports and was trade deficit of 20 against the ledger of France. This is not true for the current account[, which] would be in surplus.

( https://en.wikipedia.org/wiki/Balance_of_trade#Monetarist_th... )

A major fundamental flaw in the concept is the assumption that goods have a fixed value. In reality, their value changes according to where they are, which is the only reason it's possible to make a profit by moving them around.

Note that in the same example, if the French wine is bought by a wizard instead of a merchant, and he transmutes the wine into 50-francs-of-wine's worth of coal for export to England (the ways of wizards are mysterious), the customs house will record the value of the coal as 90 francs. It's only worth 50 francs when it's going the other way.

And if he does the same thing, transmuting the wine into coal within France, and then sells it in France, the econometric body will be happy that French GDP has increased by 90 francs, making the people of France richer.

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KentGeek 8 months ago | parent | next [-]

Get this: China sends us all this great stuff, and the only thing they get is OUR FIAT CURRENCY, which is essentially worthless. And then, what do they do with that currency? They buy our treasury bonds, which pay them interest in our own fiat currency. Not only that, but every bond they buy is more encouragement to help us keep the US economy strong and stable. The trade deficit thing looks like a great deal for us when viewed from some angles.

	▲	thaumasiotes 8 months ago \| parent [-]
		My gut says the concern arose around the balance of gold, which would behave differently. But that really doesn't work with Bastiat's example, because there is no flow of gold (or other currency) in or out of either country. But the fact that there is no flow of currency makes the problem look stupider. England is notionally benefiting because it has gained some wine "worth" 50 francs while losing some coal "worth" 70 francs. France is suffering because it's lost some wine worth 50 francs while gaining some coal worth 70 francs. With no francs traveling abroad, the matter is closed and France has ended up better off. What was the problem? From this perspective, "trade deficit" appears to be synonymous with "gains from trade". (But note that the analogy falls apart immediately; England is also experiencing gains from trade, but it has a surplus instead of a deficit. The difference is driven by the artificial division of the trade into two legs, one of which happens first. If the import happens first, you get a surplus. If not, you get a deficit.) With fiat, I think there is a concern floating around that if some foreign party absorbs a lot of our currency, and then we print more to replace the loss (so that we continue to have an appropriate amount domestically), the foreign party could suddenly crash the value of the currency by deciding to spend it. That's true. It can't be the origin of the fear of trade deficits, though, because nothing similar appears in Bastiat's example, where currency never moves. It's more analogous to the traditional fear of seeing your country's supply of gold drained away by trade.

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graemep 8 months ago | parent | prev [-]

That sounds like a forerunner to Ricardian comparative advantage which is a major (really the major) reason for thinking international trade makes everyone better off.

https://en.wikipedia.org/wiki/Comparative_advantage

	▲	thaumasiotes 8 months ago \| parent [-]
		Forerunner? Bastiat would have been 15 when Ricardo published. But note also that the example doesn't make any use of comparative advantage. It's sufficient that the value of the coal is different in different places. This is about how water is more valuable when you're dying of thirst, not about how water is easy to produce if you live on an island in a freshwater lake.