Editing Balance of trade (section)

===Monetarist theory===
Prior to 20th-century monetarist theory, the 19th-century economist and philosopher [[Frédéric Bastiat]] expressed the idea that trade deficits actually were a manifestation of profit, rather than a loss. He proposed as an example to suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit. He supposed he was in France and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs. If in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France (the customhouse would record an import of 70 francs), and was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the customhouse would say that the value of imports exceeded that of exports and was trade deficit of 20 against the ledger of France. This is not true for the current account that would be in surplus.

By ''[[reductio ad absurdum]]'', Bastiat argued that the national trade deficit was an indicator of a successful economy, rather than a failing one. Bastiat predicted that a successful, growing economy would result in greater trade deficits, and an unsuccessful, shrinking economy would result in lower trade deficits. This was later, in the 20th century, echoed by economist [[Milton Friedman]].

In the 1980s, Friedman, a [[Nobel Memorial Prize in Economic Sciences|Nobel Memorial Prize]]-winning economist and a proponent of [[monetarism]], contended that some of the concerns of trade deficits are unfair criticisms in an attempt to push macroeconomic policies favorable to exporting industries.

Friedman argued that trade deficits are not necessarily important, as high exports raise the value of the currency, reducing aforementioned exports, and vice versa for imports, thus naturally removing trade deficits ''not due to investment''. Since 1971, when the Nixon administration decided to abolish fixed exchange rates, America's Current Account accumulated trade deficits have totaled $7.75 trillion as of 2010. This deficit exists as it is matched by investment coming into the United States – purely by the definition of the balance of payments, any current account deficit that exists is matched by an inflow of foreign investment.

In the late 1970s and early 1980s, the U.S. had experienced high inflation and Friedman's policy positions tended to defend the stronger dollar at that time. He stated his belief that these trade deficits were not necessarily harmful to the economy at the time since the currency comes back to the country (country A sells to country B, country B sells to country C who buys from country A, but the trade deficit only includes A and B). However, it may be in one form or another including the possible tradeoff of foreign control of assets. In his view, the "worst-case scenario" of the currency never returning to the country of origin was actually the best possible outcome: the country actually purchased its goods by exchanging them for pieces of cheaply made paper. As Friedman put it, this would be the same result as if the exporting country burned the dollars it earned, never returning it to market circulation.<ref>{{cite web|url=http://www.ideachannel.tv/|title=TheIdeaChannel.tv|website=www.ideachannel.tv|access-date=15 March 2018|archive-date=10 December 2006|archive-url=https://web.archive.org/web/20061210002522/http://www.ideachannel.tv/|url-status=dead}}</ref>

This position is a more refined version of the theorem first discovered by [[David Hume]].<ref>{{cite book|author=Hume, David|title=Essays, Moral, Political, and Literary|year=1904|url=https://archive.org/details/in.ernet.dli.2015.45548}}</ref> Hume argued that England could not permanently gain from exports, because hoarding gold (i.e., currency) would make gold more plentiful in England; therefore, the prices of English goods would rise, making them less attractive exports and making foreign goods more attractive imports. In this way, countries' trade balances would balance out.

Friedman presented his analysis of the balance of trade in ''[[Free to Choose]]'', widely considered his most significant popular work.