# How can a trade deficit exist? **URL:** \ **Category:** Factual Questions\ **Created:** [February 18, 2005, 7:08pm UTC](https://boards.straightdope.com/t/how-can-a-trade-deficit-exist/290765 "2005-02-18T19:08:28Z")\ **Posts on this page:** 7\ **Page:** 1
**Author:** ![Kel\_Varnsen\_Latex\_Division](https://avatars.discourse-cdn.com/v4/letter/k/aeb1de/32.png) [@Kel\_Varnsen\_Latex\_Division](https://boards.straightdope.com/u/Kel_Varnsen_Latex_Division)\ **Post date:** [February 18, 2005, 7:08pm UTC](https://boards.straightdope.com/t/how-can-a-trade-deficit-exist/290765/1 "2005-02-18T19:08:28Z")
Suppose Country X sells Country Y 1000 apples for $500 and this is all the trade the two countries have. How could this creat a trade deficit? It sounds like an even trade - money for a product, product for money. Why does it matter if it is apples or money being traded? ---
**Author:** ![FatBaldGuy](https://avatars.discourse-cdn.com/v4/letter/f/ecd19e/32.png) [@FatBaldGuy](https://boards.straightdope.com/u/FatBaldGuy)\ **Post date:** [February 18, 2005, 7:28pm UTC](https://boards.straightdope.com/t/how-can-a-trade-deficit-exist/290765/2 "2005-02-18T19:28:56Z")
A trade deficit occurs when a country imports more goods than it exports. In other words, more money is leaving the country than is coming in. Money that would be boosting the local economy if people were buying goods made at home instead of in other countries. ---
**Author:** ![Captain\_Lance\_Murdoch](https://avatars.discourse-cdn.com/v4/letter/c/47e85d/32.png) [@Captain\_Lance\_Murdoch](https://boards.straightdope.com/u/Captain_Lance_Murdoch)\ **Post date:** [February 18, 2005, 7:35pm UTC](https://boards.straightdope.com/t/how-can-a-trade-deficit-exist/290765/3 "2005-02-18T19:35:04Z")
In the OP example, Country X’s money would be worth diddly-squat. You couldn’t use it to buy anything from X because they have no goods or services. ---
**Author:** ![Colibri](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/colibri/32/1841_2.png) [@Colibri](https://boards.straightdope.com/u/Colibri)\ **Post date:** [February 18, 2005, 7:50pm UTC](https://boards.straightdope.com/t/how-can-a-trade-deficit-exist/290765/4 "2005-02-18T19:50:45Z")
> [@Kel Varnsen - Latex Division](#): > > Suppose Country X sells Country Y 1000 apples for $500 and this is all the trade the two countries have. How could this creat a trade deficit? It sounds like an even trade - money for a product, product for money. Why does it matter if it is apples or money being traded? As \*\*Fat Bald Guy \*\* indicates, that $500 is now in circulation in Country X rather than in Country Y. It can circulate internally, or Country X can use it to buy something from Country Z. In this example, in the case of non-durable goods, once the apples are consumed, Country Y has nothing. ---
**Author:** ![Freddy\_the\_Pig](https://avatars.discourse-cdn.com/v4/letter/f/a587f6/32.png) [@Freddy\_the\_Pig](https://boards.straightdope.com/u/Freddy_the_Pig)\ **Post date:** [February 18, 2005, 10:03pm UTC](https://boards.straightdope.com/t/how-can-a-trade-deficit-exist/290765/5 "2005-02-18T22:03:08Z")
> [@Kel Varnsen - Latex Division](#): > > Suppose Country X sells Country Y 1000 apples for $500 and this is all the trade the two countries have. How could this create a trade deficit? The question doesn’t make any sense. The situation that you have described **is** a trade deficit, by definition. > [@](#): > > It sounds like an even trade - money for a product, product for money. Why does it matter if it is apples or money being traded? In one sense, it doesn’t. You’re right–if both parties that made the trade are happy, nobody need be any worse off. A large and persistent trade deficit between two countries, however, represents an _imbalance_ which may end in a painful correction. If all the goods are going to Country Y, and all the dollars are going to Country X, and assuming the two countries use different currency, what is Country X doing with all those dollars? Perhaps they are investing them in Country Y. Perhaps they are simply holding them as a store of value, preferring them to their own currency. In either case, should they stop doing so at some point, the result could be a currency devaluation and/or a spike in interest rates for Country X. Not the end of the world, but no fun either. ---
**Author:** ![19ForMe](https://avatars.discourse-cdn.com/v4/letter/1/439d5e/32.png) [@19ForMe](https://boards.straightdope.com/u/19ForMe)\ **Post date:** [February 19, 2005, 12:06am UTC](https://boards.straightdope.com/t/how-can-a-trade-deficit-exist/290765/6 "2005-02-19T00:06:24Z")
> [@](#): > > Originally Posted by **Kel Varnsen - Latex Division** > Suppose Country X sells Country Y 1000 apples for $500 and this is all the trade the two countries have. How could this create a trade deficit? The trade deficit is measured by the goods moving. It ignores the cash. A good question is what is done with the $500 cash in the hands of Country X citizens. Trade balance calculations do not include investments so if the $500 is used by the X Country citizen develop an apple orchard in Country Y, that is not counted. Country Y workers could benefit in this situation from investments made by country X citizens. The investments would create more business and more output in the future. Unless the calculation has been updated in the past few years, it also does not include services. If the $500 is used to purchase a campaign by a Country Y advertising firm for selling the apples to customers in country X and Y, that would not count. I suspect the real world worry would be Country X citizens use the cash to buy up tremendous assets in Country Y. The population of Country Y would then have less control of their own destiny. Also Country Y could become dependent on Country X for capital investments. If it stopped, I’m not sure what would happen next. ---
**Author:** ![rfgdxm](https://avatars.discourse-cdn.com/v4/letter/r/c0e974/32.png) [@rfgdxm](https://boards.straightdope.com/u/rfgdxm)\ **Post date:** [February 19, 2005, 12:26am UTC](https://boards.straightdope.com/t/how-can-a-trade-deficit-exist/290765/7 "2005-02-19T00:26:37Z")
> [@19ForMe](#): > > I suspect the real world worry would be Country X citizens use the cash to buy up tremendous assets in Country Y. The population of Country Y would then have less control of their own destiny. Also Country Y could become dependent on Country X for capital investments. If it stopped, I’m not sure what would happen next. Basically trade deficits result in differential investment between the 2 countries. As in years ago the US had trade and budget deficits. Foreign countries used the excess dollars to buy Treasury Notes to finance the budget deficit.