Trade Deficits and other Disasters – 2

This isĀ  a continuation of a previous post which was in response to points that Mallikarjuna asked about trade deficits and Chinese exports to India.

First let’s understand trade. Voluntary trade is good for both parties. This is true in the case of individuals trading among themselves within a region, for obvious reasons. If both parties didn’t gain something from the trade, it would not happen since by definition the trade is voluntary. For less obvious reasons, in general voluntary trade across political borders also leads to gains.

We have discussed an important theoretical concept called “comparative advantage” in this class. In the context of international trade, even if country A has a lower productivity in every activity compared to country B (meaning A has no “absolute advantage” over B), both countries would have an “comparative advantage” in some activity. Continue reading “Trade Deficits and other Disasters – 2”