Question

Accounting shows that the only way to get rid of a trade deficit is to stop borrowing so much. Prove it mathematically and then explain it in words.

Answer 1

Trade deficit refers to the excess of imports over exports.

It is the net total amount due for payment to rest of the world, for goods imported from them.

Trade Deficit = Imports – Exports

Here, imports are goods imported and payment made to rest of the world; and exports are goods exported and payments received from rest of the world.

In order to reduce trade deficit, either we can reduce imports or increase exports.

Reducing imports would mean reducing borrowing from rest of the world.

This would bring down the value of imports, and thus trade deficit.