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The balance of trade is only one side of the larger balance of payments that is so frequently ignored by mainstream economists.
There is a balance between the capital account and the current account, the latter being called the balance of trade. If there is a deficit in the current account (trade deficit) there will be an equally large surplus in the capital account (investment into the country). And that is the case. Foreign countries invest more money in the US than we invest in them. Unfortunately, much of that investment is in US government bonds.
For every trade deficit, there is a capital surplus. Don't forget the other side of the equation.
False. The balance of PAYMENTS is equal. The balance of trade is only one side of that equation. You are completing forgetting about the capital account.Im impelled to be concerned as to what you believe to be your understanding.
Econ 101 class one day one:
of course that idiotic since we buy from China in dollars; so if we buy $100 of stuff from them they have to buy $100 of stuff from us and our GDP then stays the same.
This is called balance of trade, in theory it should always be equal. In reality it never is. Maybe you should have stayed past econ 101.
Correct, they can be exchanged. But that changes nothing. The only reason somebody would want US dollars is if they plan to buy US goods or invest in the US. So the money will come back to the United States, either in the form of individuals investing in the US or individuals buying US exports. It does not matter if the person who does the buying or investing is the same person who imported to the US; in fact rarely are the two people the same.Yes, China cannot spend American dollars in China. But they can exchange them. It happens in real life. They exchange rate also varies dependant on a countries trade surplus or deficit (amongst other factors, such as debt and printing money).
The fact that the Chinese producer has invested the dollars in American corporate bonds doesn't pose any threat to American economic fundamentals. What we have here is a situation where claims on real savings have been channeled to America Inc. Once these claims are exercised and real savings are employed efficiently it only promotes a further expansion in US real wealth. Is anything wrong with this? All we have here is that instead of buying final American consumer goods, the Chinese producer buys future US goods. Investing in companies results in economic growth and production. Who does the investing really matters little.Going even further, lets take a real life example. We have a trade deficit with China. What do they do with all that money? Mainly two things. 1) they buy our securities (meaning in the future we are going to owe them money, or whatever they choose to buy with that money) and 2) they buy american companies. What do they do with the profit from these American companies? Well they can't take the cash, since they can't spend it, but they can further take goods out of our society and use it in theirs.
So please keep saying that trade deficits don't matter. One day, when we all work for the Chinese, I guess you will have no problem with that.
Focusing on the nature of trade deficits completely misses the larger problem, which is why so many in government try to shift the debate to China so the public thinks less about their own wasteful policies.
Transcript from the topic Trade deficits are ALWAYS detrimental to their nations GDPs,
post #91 posted @ 4:08PM, Febuary 24, 2012:
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Quote: Originally Posted by DSGE;4855812]
When China uses its supply of US dollars to buy financial assets from the US, yes the purchase of those assets doesn't count towards GDP (nor does the sale). However, what occurs is a transfer of US dollars from China to the US; from whoever bought the asset in China, to whoever sold the asset in the US. The dollars end up back in the US,
[where they are then used for consumption/investment which does count towards GDP].
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DSGE, the GDP doesnt account for currency, it only accounts for goods and service products produced. It doesnt account for the sale, trade or otherwise transfer of paper except when that paper represents the final sale of products.
When the accountings of U.S. dollars earned by foreigners pass through foreign banks, they are acknowledged to belong to foreign entities. If those dollars are later used to purchase U.S. products, THEY REDUCE USAs TRADE DEFICIT.
It works in the same manner if the foreigners funds were derived from purely foreign transactions or if the funds were directly or indirectly derived from their trade with the USA entities.
I do not know what proportion of U.S. dollars earned by foreigners only pass through USA banks with no foreign connections before going on to later fund purchases of U.S. products. But I do not believe its a great proportion of global trades contributions to U.S. GDP that is not actually attributed to global trade.
The short answer to the question as to transfers of wealth directly or indirectly derived from foreign entities funding contributions to USAs GDP but not being attributed to global trade is NO, that very seldom occurs.
Respectfully, Supposn
Transcript from the topic Trade deficits are ALWAYS detrimental to their nations GDPs,
post #91 posted @ 4:08PM, Febuary 24, 2012:
/////////////////////////////////////////////////////////////////////////////////////////////////////
Quote: Originally Posted by DSGE;4855812]
When China uses its supply of US dollars to buy financial assets from the US, yes the purchase of those assets doesn't count towards GDP (nor does the sale). However, what occurs is a transfer of US dollars from China to the US; from whoever bought the asset in China, to whoever sold the asset in the US. The dollars end up back in the US,
[where they are then used for consumption/investment which does count towards GDP].
////////////////////////////////////////////////////////////////////////////////////////////////////
DSGE, the GDP doesnt account for currency, it only accounts for goods and service products produced. It doesnt account for the sale, trade or otherwise transfer of paper except when that paper represents the final sale of products.
When the accountings of U.S. dollars earned by foreigners pass through foreign banks, they are acknowledged to belong to foreign entities. If those dollars are later used to purchase U.S. products, THEY REDUCE USAs TRADE DEFICIT.
It works in the same manner if the foreigners funds were derived from purely foreign transactions or if the funds were directly or indirectly derived from their trade with the USA entities.
I do not know what proportion of U.S. dollars earned by foreigners only pass through USA banks with no foreign connections before going on to later fund purchases of U.S. products. But I do not believe its a great proportion of global trades contributions to U.S. GDP that is not actually attributed to global trade.
The short answer to the question as to transfers of wealth directly or indirectly derived from foreign entities funding contributions to USAs GDP but not being attributed to global trade is NO, that very seldom occurs.
Respectfully, Supposn
Dude, it's pretty straight forward. Any money that flows out of the country when buying foreign goods (contributing to a trade deficit) does one of two things: It either is used by foreign countries to buy US export goods (reducing the deficit), or it flows back into the country through the capital and financial account as US dollar loans/foreign direct investment/etc and is used to buy US goods domestically, contributing to GDP. They use US dollars to, say, buy US bonds. Yes, the purchase of a bond doesn't count towards GDP. But the bond issuer uses the money from the sale of the bond to buy real goods and services. Imports do not lower GDP.
Transcript from the topic “Trade deficits are ALWAYS detrimental to their nations’ GDPs”,
post #91 posted @ 4:08PM, Febuary 24, 2012:
/////////////////////////////////////////////////////////////////////////////////////////////////////
Quote: Originally Posted by DSGE;4855812]
When China uses its supply of US dollars to buy financial assets from the US, yes the purchase of those assets doesn't count towards GDP (nor does the sale). However, what occurs is a transfer of US dollars from China to the US; from whoever bought the asset in China, to whoever sold the asset in the US. The dollars end up back in the US,
[where they are then used for consumption/investment which does count towards GDP].
////////////////////////////////////////////////////////////////////////////////////////////////////
DSGE, the GDP doesn’t account for currency, it only accounts for goods and service products produced. It doesn’t account for the sale, trade or otherwise transfer of “paper” except when that paper represents the final sale of products.
When the accountings of U.S. dollars earned by foreigners pass through foreign banks, they are acknowledged to belong to foreign entities. If those dollars are later used to purchase U.S. products, THEY REDUCE USA’s TRADE DEFICIT.
It works in the same manner if the foreigners funds were derived from purely foreign transactions or if the funds were directly or indirectly derived from their trade with the USA entities.
I do not know what proportion of U.S. dollars earned by foreigners only pass through USA banks with no foreign connections before going on to later fund purchases of U.S. products. But I do not believe it’s a great proportion of global trade’s contributions to U.S. GDP that is not actually attributed to global trade.
The short answer to the question as to transfers of wealth directly or indirectly derived from foreign entities funding contributions to USA’s GDP but not being attributed to global trade is NO, that very seldom occurs.
Respectfully, Supposn
Dude, it's pretty straight forward. Any money that flows out of the country when buying foreign goods (contributing to a trade deficit) does one of two things: It either is used by foreign countries to buy US export goods (reducing the deficit), or it flows back into the country through the capital and financial account as US dollar loans/foreign direct investment/etc and is used to buy US goods domestically, contributing to GDP. They use US dollars to, say, buy US bonds. Yes, the purchase of a bond doesn't count towards GDP. But the bond issuer uses the money from the sale of the bond to buy real goods and services. Imports do not lower GDP.
does supposin have a recommendation to improve GDP?
Econ 101 class one day one:
of course that idiotic since we buy from China in dollars; so if we buy $100 of stuff from them they have to buy $100 of stuff from us and our GDP then stays the same.
This is called balance of trade, in theory it should always be equal. In reality it never is. Maybe you should have stayed past econ 101.Its equal huh? Not according to the BEAFalse. The balance of PAYMENTS is equal. The balance of trade is only one side of that equation. You are completing forgetting about the capital account.
BEA : Balance of Payments Graph
The graph only goes back to 2003. Since then we have run a BoP deficit each and every single year. The broad theory says it should be equal. It doesn't account for exchange rates.
Correct, they can be exchanged. But that changes nothing. The only reason somebody would want US dollars is if they plan to buy US goods or invest in the US. So the money will come back to the United States, either in the form of individuals investing in the US or individuals buying US exports. It does not matter if the person who does the buying or investing is the same person who imported to the US; in fact rarely are the two people the same.
Exporters usually trade the foreign currency they earn for local currency. The person who buys the foreign currency is often an importer (someone who needs the money to buy goods priced in the foreign currency) or a bank, which then exchanges the money again with an importer.
Partially right, but overall wrong, because you are missing some key points. If someone in China exchange US$ for yuan, that doesn't mean that the bank that took the $s has to spend the cash in the US. Nor does it mean they are going to find someone to take the $ off their hand. What if they can't find someone that wants to invest in the US or buy US products, there isn't an unlimited supply of this.
What happens is this. Now there is a surplus of US$ floating about and there is less Yuan. Supply and demand takes over at that point. The price of the US$ goes down and the Yuan goes up, devaluing the US$, and vice versa for the Yuan.
That is the net impact of trade deficits and negative balance of payments.
Here
Balance of payments - Wikipedia, the free encyclopedia
This is called balance of trade, in theory it should always be equal. In reality it never is. Maybe you should have stayed past econ 101.
Its equal huh? Not according to the BEA
BEA : Balance of Payments Graph
The graph only goes back to 2003. Since then we have run a BoP deficit each and every single year. The broad theory says it should be equal. It doesn't account for exchange rates.
"Balance of Payments" is the heading. The graph shows one component of the balance of payments. You'll see it says "Current account balance and its components".
The current account is in deficit. It's balanced by a capital and financial account surplus. If you think about it for half a second, the two obviously must always be balanced. A current account deficit means we consume more than we produce. The only way to fund that is if we have capital inflows from abroad.
Im pretty sure that is accounted for in the balance if income line. But I can't find where it explains that.Its equal huh? Not according to the BEA
BEA : Balance of Payments Graph
The graph only goes back to 2003. Since then we have run a BoP deficit each and every single year. The broad theory says it should be equal. It doesn't account for exchange rates.
"Balance of Payments" is the heading. The graph shows one component of the balance of payments. You'll see it says "Current account balance and its components".
The current account is in deficit. It's balanced by a capital and financial account surplus. If you think about it for half a second, the two obviously must always be balanced. A current account deficit means we consume more than we produce. The only way to fund that is if we have capital inflows from abroad.
In either sense it doesn't really matter. The US trade deficit ends up with foreign ownership of our debt and our companies. Which I don't think you are arguing against.
Edit: is anyone else having a problem with the quoting function, it doesn't seem to be working properly.
But we have a trade deficit and China has a trade surplus and our GDP is growing less than China's.You misunderstand the national accounts. GDP is an estimate of national income. The expenditure method is a way to measure GDP.
If you have two economies that are equally in balance, if one economy begins to accelerate, all else being equal, the faster growing economy will experience a trade deficit. That is an effect, not a cause. The trade deficit is an outcome of the accelerating growth, not detrimental to growth.
Likewise, if two economies are balanced, and people in one economy decide to invest in the other economy, providing jobs and wealth in the other economy, the other economy will experience a trade deficit. That is a mathematical fact. But again, the trade deficit is an outcome, an effect.
Both are an accounting function. They are not representative of the underlying economics.
Im pretty sure that is accounted for in the balance if income line. But I can't find where it explains that.
In either sense it doesn't really matter. The US trade deficit ends up with foreign ownership of our debt and our companies. Which I don't think you are arguing against.
But we have a trade deficit and China has a trade surplus and our GDP is growing less than China's.You misunderstand the national accounts. GDP is an estimate of national income. The expenditure method is a way to measure GDP.
If you have two economies that are equally in balance, if one economy begins to accelerate, all else being equal, the faster growing economy will experience a trade deficit. That is an effect, not a cause. The trade deficit is an outcome of the accelerating growth, not detrimental to growth.
Likewise, if two economies are balanced, and people in one economy decide to invest in the other economy, providing jobs and wealth in the other economy, the other economy will experience a trade deficit. That is a mathematical fact. But again, the trade deficit is an outcome, an effect.
Both are an accounting function. They are not representative of the underlying economics.
Im pretty sure that is accounted for in the balance if income line. But I can't find where it explains that.
It's not. The Income account is a sub-account of the current account that records net income payments. That's got a positive balance, meaning that the US is receiving net income from investments made abroad and such. The capital and financial account is not mentioned in the graph.
In either sense it doesn't really matter. The US trade deficit ends up with foreign ownership of our debt and our companies. Which I don't think you are arguing against.
That's true, but I don't think that's a bad thing.
yeah well a little bit of money would make Ghana's GDP grow.But we have a trade deficit and China has a trade surplus and our GDP is growing less than China's.You misunderstand the national accounts. GDP is an estimate of national income. The expenditure method is a way to measure GDP.
If you have two economies that are equally in balance, if one economy begins to accelerate, all else being equal, the faster growing economy will experience a trade deficit. That is an effect, not a cause. The trade deficit is an outcome of the accelerating growth, not detrimental to growth.
Likewise, if two economies are balanced, and people in one economy decide to invest in the other economy, providing jobs and wealth in the other economy, the other economy will experience a trade deficit. That is a mathematical fact. But again, the trade deficit is an outcome, an effect.
Both are an accounting function. They are not representative of the underlying economics.
China has a trade surplus and Ghana has a trade deficit and Ghana's GDP is growing more than China's.
Im pretty sure that is accounted for in the balance if income line. But I can't find where it explains that.
It's not. The Income account is a sub-account of the current account that records net income payments. That's got a positive balance, meaning that the US is receiving net income from investments made abroad and such. The capital and financial account is not mentioned in the graph.
In either sense it doesn't really matter. The US trade deficit ends up with foreign ownership of our debt and our companies. Which I don't think you are arguing against.
That's true, but I don't think that's a bad thing.
WHOA WHOA WHOA
How is the Chinese owning our businesses not a bad thing? That means they are getting rich, not American's.
yeah well a little bit of money would make Ghana's GDP grow.But we have a trade deficit and China has a trade surplus and our GDP is growing less than China's.
China has a trade surplus and Ghana has a trade deficit and Ghana's GDP is growing more than China's.
Heck money sent back to mexico by illegal immigrants is a large part of Mexico's GDP.
It's not. The Income account is a sub-account of the current account that records net income payments. That's got a positive balance, meaning that the US is receiving net income from investments made abroad and such. The capital and financial account is not mentioned in the graph.
That's true, but I don't think that's a bad thing.
WHOA WHOA WHOA
How is the Chinese owning our businesses not a bad thing? That means they are getting rich, not American's.
No it doesn't.
WHOA WHOA WHOA
How is the Chinese owning our businesses not a bad thing? That means they are getting rich, not American's.
No it doesn't.
Of course it does. Think about it. If 1 man in China own exxon-mobile and he sells just enough gas in the US to pay for his workers then ships the rest back to China and gives it out for free. That means the US is getting less then what it is producing, as a result of our past trade deficit.
The more US businesses they own, the more free stuff China is getting. Theoretically it is even possible that China could own every business in the world, and every single Chinese person could get everything they wanted for free, while we work to provide it for them.
No it doesn't.
Of course it does. Think about it. If 1 man in China own exxon-mobile and he sells just enough gas in the US to pay for his workers then ships the rest back to China and gives it out for free. That means the US is getting less then what it is producing, as a result of our past trade deficit.
What are you talking about? That doesn't make any sense. Are you imagining that owning exxon-mobil means that there's just this stock of oil that you suddenly get to do whatever you want with?
Also, are you imagining that if an American owns exxon-mobil they'll just take oil and give it out for free to Americans? You haven't actually demonstrated how there's any difference between US ownership and foreign ownership.
The more US businesses they own, the more free stuff China is getting. Theoretically it is even possible that China could own every business in the world, and every single Chinese person could get everything they wanted for free, while we work to provide it for them.
That's idiotic. How much stuff are you getting for free from corporations owned by Americans?
