Is negative trade balance bad for the economy?

Not necessarily. Imports are a benefit. Exports are a cost. How so?

• Imports are goods that we consume, but have used no resource in producing
• Exports are goods that we have used resource in producing, but that we do not consume

It is therefore clear that imports are good and exports are bad. Exports are the price that we have to pay, in order to be able to import.

But what if the value of imports exceeds the value of exports? That can only happen if:

• We are drawing down on net overseas assets; or
• We are receiving net capital inflows

Now, the first of these is bad. It means we are running down our assets, which are part of our national net wealth, in order to pay for current consumption.

The second of these is good (mostly). It means other countries are investing in our country, which gives us jobs, productivity and know-how. The only thing bad about it is that from a capital perspective, part of the proceeds of our country’s productive stock, go to someone else.

So the answer to the question is as follows:

• A negative trade balance is a good thing in itself (in the same way that having a party is better than working)
• Whether it’s good or bad for our economy in the long run, depends on how we finance it