by DD Sow

Created on: November 10, 2008   Last Updated: December 09, 2008

Trade deficits harm the economy just like credit cards affect personal income. Factors that can affect the balance of trade figures include: 1. Prices of goods manufactured at home (influenced by supply). 2. Exchange Rates (Affective trade with foreign countries) 3. Offset agreements (specially dealing with countries that purchase in high numbers like Canada/Mexico/Israel) 4. Taxes (this is possibly the most significant as it is really the citizens of the lowest income who are really affected by tax hikes). These are factors in many cases are the heart beat of the economy and if these components are of some concern then it can slower the economy causing it to go in to stagflation which in many cases could lead to negative growth.

Many Economists believe that trade deficits have a very little impact on the overall economy. In many ways that is true because when companies are unable to meet certain investment returns the common process is to redirect its capital to a seperate item that would give them a better investment return or take loans from their respective credit institutions. Such is the case, that while doing so you may be able to create jobs, actually make a profit or revitalise a certain industry but that is only if a 100% profit of the investment return is made and this circumstancially is rare. What is quite common is larger loans to re-direct and re-strategise and the process of attaining profits is a long-term outcome. Depending on how long-term this may be, during this process key additional capital that is used to direct operations often is used to pay interests on loans borrowed. This is a chain that often results in chaos because in the final analysis more capital is used to pay for such fees as taxes, credit interest, and please don't forget like companies its employees are also affected by large. Since that is the case this would also mean higher insurance, compensation or severannce for employees. For instance, should the case be that we live in a trade deficit but the scenerio is the deficit is not high, comparatively around $300 million, taxes, credit, loans, investments, all these items would have little impact where as how we stand now at $10 trillion, is just a scenerio we should leave to the accountants and not the politicians.

Nobody likes to pay high taxes but that is what happens when you have large deficits be it trade, employment, or even budget. Deficit means shortage and these shortages can't just can't be ingnored. It costs to even keep the numbers at a standstill so why not work towards a reduced deficit when it affects all parts of society.

Learn more about this author, DD Sow.
Click here to send this author comments or questions.