Understanding Trade Deficits and Current Account Surpluses

A trade deficit occurs when a country buys more abroad than it sells to foreign countries. On the other hand, a current account deficit or surplus is the combination of a trade balance surplus or deficit plus transfers and trading services. Larry Kudlow's statement on CNBC, praising trade deficits for causing current account surpluses, is mistaken due to a mix-up of the different elements of the balance of payments. It is crucial to grasp the link between the current account and the capital account, which Mr. Kudlow misunderstood. Critics of globalization often argue that spending money abroad takes away from US purchasing power and domestic job creation. However, this overlooks the fact that money spent by US citizens abroad eventually circulates back to the US economy through various channels, boosting imports and driving economic growth.