Trade Deficit
From Zanecorpwiki
2010-02-17
Definitions
- EconTalk discussion
- There's a book, Globalization, by Don Boudreaux, but it's not on Amazon
Trade Deficit: the difference in value of goods flowing in and out of a nation
- doesn't count components
- doesn't count profit
Example: the iPods components are sourced from many places, probably mostly from south Asia. It's assembled in China. Therefore, every iPod bought increases China's trade surplus and the US trade deficit. However, the actual profits for the iPod go primarily to Apple, a US company, then to the component companies, mostly in south Asia and Tiawan, and China probably benefits least from the iPod sale.
- doesn't pay attention to non-durable goods, like services
Americas economy is something like 90% services; I've heard it said that financial services alone account for 25% of the economy. Therefore you'd expect that America have a trade deficit, and given that service wages are generally higher than manufacturing wages, you want a trade deficit. Part of the thing is that we're spending our time working at better service jobs and buying manufactured goods on the cheap. That's a good thing.
Current Account Balance: the difference in the value of all goods and services flowing in and out of a nation
- the US still runs a large deficit in the current account balance, though it's less than the trade deficit
- it still doesn't matter
Even assuming that these thing do a good job of tracking where the money goes (they don't), let's say we do have a real trade deficit of 450 billion in 2009. That means we have a service surplus of about 70 bn in 2009. What about the remaining $380 bn?
Capital Account: The Capital Account is the inverse of the Current Account and indicates how much foreign money is flowing into a nation in the form of capital investment.
Taken as a whole, this mean that ever since we started measuring these things in the early 70's, the US has attracted sufficient foreign capital to sustain our high standard of living and make us the most productive nation in the world. Relative productivity is always and forever about capital investment. We are the most productive because we have a huge capital account surplus. America is where the world invests, and we benefit by it greatly.[notes 1]
The trade deficit is just the other side of the capital surplus. It's what gives us low interest rates and ready money to start new business and fund research.
Debt
The trade deficit has nothing to do with debt (not directly). When you buy a PlayStation3, you increase the trade deficit by $300, but no one owes anyone anything.
Notes
- ↑ We can assume the world benefits too, BTW, since if there was a better place to invest, they'd be investing there.
