Issues in international trade and exchange rates, like other topics in macroeconomics, are complicated and controversial. In order to weigh in on the issues, we first need to make sure we understand the definitions of various international trade investment, and exchange rate concepts. With these terms under our belts we are able to understand better why trade deficits may or may not be a problem.

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Clearly it depends on what a country is importing. We found that trade deficits are often the result of a deficiency of national saving and no amount of tampering with exchange rates or trade barriers can do much to help a nation that refuses to save enough to meet its investment needs. To what extent a trade deficit becomes a major problem depends very much on how long it goes on. Clearly longstanding trade deficits can accumulate into large international debt positions that could become intolerable. Once things reach that stage, a country exposes itself to financial crises. Therefore it is desirable for countries to keep their trade imbalances both small and temporary. Paying close attention to the relative sizes of saving and investment is, therefore, critical to staving off international calamities.