Why does the trade deficit mean foreign companies are buying more US bonds and investing more in US companies?
Tarun B asked:
I understand balance of payments… But i can′t really understand why the money we use to buy foreign goods has to come back to America.
I understand balance of payments… But i can′t really understand why the money we use to buy foreign goods has to come back to America.
Please help!
Simply the world to two parts - US and foreign countries.
Trade deficit means foreign countries sell to US more than they buy from it. This leaves them with surplus dollars on their hands.
A wise man never just sits on the money, he invests them. Where can you invest dollars? Only into US companies or government bonds.
Dollars are used for trade and investment outside of US, but that all is happening within the “foreign countries” object. In the end, all money returns to US either as payment for goods or investment.