“Imports equals exports, or you can rearrange the equation to say exports equals imports – @EconCircus
The questions: Is a trade surplus or deficit possible in a barter economy?
The answer: Yes, but only when one someone gives something away for free. Under voluntary trade one party exchanges goods or services for another’s in a mutually beneficial transaction. Both parties receive something they value more than what they are offering; therefore, only when someone gives something, requiring nothing in return, can a surplus/deficit be possible.
The problem with the balance of trade can be seen visually when America’s imports and exports are examined, courtesy the St. Louis Fed:
When you take the quarterly data from 1947 to Q1 2020, you will have 293 data points for both imports and exports and will arrive at a correlation coefficient of 0.99 and an R-squared of 0.98, which is a technical way of saying that imports and exportsmove together in near perfect harmony.
What is commonly referred to as the trade deficit is the difference between the USA’s imports versus its exports, i.e. imports have almost always exceeded exports. This “deficit” is often viewed negatively by economists and policy makers.
Typically, exports are used to purchase imports, and vice versa. When a country exports (sells), the money the seller receives can then be used to import (buy) back from the opposing country. Should a country cut down on their imports (exports), then they must expect they will also be cutting down on their exports (imports). Decreasing imports while simultaneously increasing exports has not happened in the last 70 years, nor does it make any sense.
The Trade Deficit
The fundamentals of trade don’t change. So, for example, Venezuela exports oil to the USA and receives $2 million USD in return. With the $2M Venezuela buys only $1M of Snickers bars from the USA keeping the other $1M for itself. Automatically the USA is said to have a “trade deficit” of $1 million dollars because it has only imported $2M in oil but only exported $1M worth of Snickers. For some inexplicable reason, it appears that mainstream economists, no major news networks, nor any government bureaucrats, who collect this data, have asked the question: Why is this trade deficit a bad thing?
The Economic Problem
The U.S. National Income and Product Accounts (NIPA Handbook) used by the Bureau of Economic Analysis (BEA), provides a detailed explanation as to what is included and excluded of the import/export calculation, here are some of the exclusions:
…exports excludes capital expenditures by foreign residents on structures in the United States. Instead, these expenditures are included in private fixed investment… Likewise, imports excludes capital expenditures by U.S. residents on structures in the rest of the world. As the NIPAs do not record transactions in financial assets, exports and imports do not include sales to, or purchases from, the rest of the world of financial assets… NIPAs also do not include illegal goods and services…
Even if we ignore the wide margin of error inherent in a trillion-dollar calculation, we must not look past the arbitrary configuration of the calculation, specifically that financial assets such as stocks, bonds, and real estate are excluded from the calculation since they are not “goods and services.” This exclusion may be okay for the purpose of the calculation; however, what the media and policymakers fail to mention is that these very exclusions provide the explanation for the deficit. If we were to add back all financial assets, illegal activities, and every other exclusion including the accumulation of U.S. dollars by nations abroad, then what is known as a “trade deficit” would shrink entirely to NIL.
The Liberty Problem
In the USA/Venezuela example, since the purpose of trade is to exchange property, the $2M received by Venezuela becomes property of Venezuela. Should they choose to burn the money, or if they want to buy $1M or $2M of Snickers, it is their prerogative. The USA has no more say into Venezuela’s spending habits than Venezuela has in directing the USA on how to allocate the oil it just sold.
The balance of trade becomes problematic as it implies central planners should intervene on international trade in order to shrink the deficit; and, that this will be a good thing for society. Under this scenario, the only way America can have “equal trade” is if Venezuela depletes its funds and uses the $2M to buy Snickers; while a “trade surplus” can be attained if Venezuela takes out a $1M loan and buys $3 million worth of Snickers from America. That is, unless the plan all along has been to grant loans to certain nations in order for them to go into poverty for the purpose of buying goods and services abroad?
If you like photos, one of my followers on Twitter sent me a picture of a variety store in Venezuela. I was told that although government workers get paid in Bolivar, most non-government employees and entrepreneurs price their goods and services in USD. As you can see below, one Snickers bar can be bought for 2 UNIDAD or $2.00 USD in Venezuela as of last week:
Ironically enough, it is this very “trade deficit” that gives the US Dollar its strength! If we were to tabulate the number of people who save US Dollars, but also those countries who use the Greenback as a replacement currency for their own nation’s currency, it would be clear the dollar is still the world’s currency. According to the Federal Reserve Bank of New York research report, 65% of all U.S. Banknotes are in circulation outside of the country. These banknotes did not circulate across the globe from currency swap arrangements. Rather, over time, as countries sold to the USA in return for US dollars, those countries decided to keep the currency, as opposed to buying something from America.
The Planning Problem
Considerable amount of effort is spent tracking and reporting on-going trade discussions between nations to figure out how to “shrink the trade gap.” We hear stories such as China pledges to buy $200 Billion of American goods under phase one trade deal. However, no one asked what America gave up to get such a deal. We see tariffs, subsidies and countless other anti-capitalist behaviours attempting to decrease exports and increase imports.
If iPhones can be made cheaper in China than in America, the consumer wins. In exchange, if America does not produce a good or service China wants, China will buy U.S. debt, stocks and real estate. Or in cases such as Venezuela, they’ll simply take the currency and use it in their own country. Economists and policy makers should see this as a blessing and understand the advantages of having the world’s reserve currency. They should also understand it is that desire for the currency which contributes to a “trade deficit.” It is precisely the demand for U.S. debt and currency which allows the Fed to continually expand the money supply (i.e. inflation), and not suffer as harsh of consequences as other countries like Venezuela, Zimbabwe or the Weimer Republic, for the time being.
Should policy makers reach their goal of attaining a trade surplus, which literally amounts to giving goods and services away (e.g., U.S. exports goods for 1 trillion Yuan and imports NIL because it wants to hold the Yuan = a “huge” trade surplus), then rest assured, it would be when the U.S. dollar and its debt have gone out of favour for the rest of the world. At such point, the trade surplus could be astronomically high, and so too will the price of Snickers bars, along with loaves of bread, and wheelbarrows.
 @EconCircus tweets May 8, 2020
 To re-perform the calculation, go to https://fred.stlouisfed.org/series/IMPGSC1#0, add real exports to the chart then download into excel. Using the formula CORREL() and RSQ() with the data points you can verify the analysis.
 In the example the 1 Trillion yuan export less NIL imports = 1 Trillion Yuan trade surplus for America. The Yuan was used for illustrative purposes. The USD could have been used, but then the question becomes: where would China have gotten the $1 Trillion in USD dollars from?