Annual Trade Deficits

[Supposn]

If USA produces less goods and service products, (ie. reduces our GDP), it is particularly detrimental to our numbers of jobs, workers and their dependents, and enterprises that are sensitive to financial conditions of those great portions of our nation's population. Can anyone explain how lesser GDP per capita can not be economically detrimental to our nation?

Refer to wikipedia's "Import Certificates" article:
Import certificates - Wikipedia Respectfully, Supposn

 

[Dekster]

If USA produces less goods and service products, (ie. reduces our GDP), it is particularly detrimental to our numbers of jobs, workers and their dependents, and enterprises that are sensitive to financial conditions of those great portions of our nation's population. Can anyone explain how lesser GDP per capita can not be economically detrimental to our nation?

Refer to wikipedia's "Import Certificates" article:
Import certificates - Wikipedia Respectfully, Supposn

Susie makes $400 per week making 5,000 widgets.

Susie shares her job with Annie and they each make $400 per week but only manufacture 4,000 widgets.

We have 1 more worker, 1 more consumer and 1,000 less in goods.

 

[danielpalos]

Upgrading infrastructure can compensate for some of that.

 

[Moonglow]

Capitalist care about profits they don't care if Susie makes an income that allows her the ability to buy a widget.

 

[Toddsterpatriot]

I used this......

to buy this......

directly from Germany.

How much did I change US GDP?

 

[task0778]

If USA produces less goods and service products, (ie. reduces our GDP), it is particularly detrimental to our numbers of jobs, workers and their dependents, and enterprises that are sensitive to financial conditions of those great portions of our nation's population. Can anyone explain how lesser GDP per capita can not be economically detrimental to our nation?

C+I+G+(EX-IM) = GDP, where:

C = consumption
I = investment
G = government spending
EX = exports
IM = imports

Due to this mathematical identity, rising imports would naturally lower GDP. But that does not mean imports are a drag on the economy.

GDP is often used as a proxy for economic activity. It’s a pretty good tool, to be sure, but it shouldn’t be the only tool used to gauge economic activity. Other indicators can, and should, play a part as well: industrial production, retail sales, standard of living, prices (in terms of labor-hour costs), that sort of thing. By relying on a single measurement, such as GDP, it gives rise to false notions, such as imports harming an economy.

The truth of the matter is imports help economic growth, not hinder it. Remember that all trade occurs because both parties benefit. Imports occur because the buyer (who just happens to be of a different nationality from the seller) obtains a better value for a good/service than he could get domestically.

The chart above helps answers the question — What is being purchased from overseas and who is doing the purchasing? — by displaying the shares of imports in the first quarter for the five main end-use categories of foreign goods. The first two categories – Capital Goods, and Industrial Supplies and Materials – represent the nearly $300 billion worth of imports purchased by US businesses in the first quarter that include machinery, equipment, engines, aircraft, oilfield equipment, vessels, testing instruments, chemicals, lumber, minerals, newsprint, cotton, plywood, glass, rubber, wool, iron, steel, copper, etc. Together, those two categories accounted for more than half of US imports in the first quarter, and were purchases of inputs, raw materials, and machinery that help American businesses produce their “Made in the USA” outputs more efficiently and cost-effectively. By shopping globally and purchasing the lowest-priced and highest-quality products, the competitiveness of domestic producers is enhanced, which often helps them to expand US production and hire more American workers (imports = jobs).

The category “Automotive Vehicles, Parts and Engines” (15.2% of total imports) would also include purchases by US automakers of imported parts and engines, and the category “Foods, Feeds and Beverages” (almost 6% of total imports) would include purchases by US food companies of unprocessed, raw food materials like green coffee beans, nuts, sugar, foodoils, and foodgrains that will be used to produce food products made domestically. Finished consumer goods accounted for only a little more than one-quarter of US imports in the first quarter (26.9%) and those consumer products (toys, clothing, footwear, TVs, electronics, musical instruments, appliances, jewelry, etc.) are purchased by retailers like Walmart, Dollar General, Macy’s, Target, CostCo, Office Depot, Home Depot and Best Buy. By shopping globally on behalf of US consumers for the best products at the lowest prices, domestic retailers can therefore deliver tremendous value to all Americans, especially low- and middle-class US households.
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Every voluntary market transaction creates wealth because it benefits both the buyer and the seller, and that doesn’t change in an international transaction when the buyer and seller are on different sides of an imaginary line called a national border. For every export transaction, there’s an American seller who is made better off, and for every import transaction there is an American buyer who is made better off. Because by buying an import at a lower price he/she has more money to spend on something else. An increase in imports means that American consumers are better off (not worse off), US businesses are more competitive (not less competitive), which translates into a higher (not lower) standard of living and an increase (not decrease) in the number of US jobs.

 

[task0778]

The truth is that an idea like import certificates is actually just another form of protectionism. In effect the cost of imports is raised and passed on to the consumer in the form of higher prices, or to the employees in the form of reduced benefits and fewer hours worked. The thought is to make imports less attractive and the end result is that inflation goes up and our standard of living goes down because our paychecks don't go as far as they used to. Think about it: if the cost of the import is X and the price to goes up to X+Y with Y being the added cost of the certificate, then that means the consumer has less money (Y) to spend on something else. And in some cases the import is materials used by an American manufacture to produce a domestic product which now costs more to make and more to buy. So your economic growth took a hit in the effort to reduce the trade deficit.

 

[Supposn]

Susie makes $400 per week making 5,000 widgets.

Susie shares her job with Annie and they each make $400 per week but only manufacture 4,000 widgets.

We have 1 more worker, 1 more consumer and 1,000 less in goods.

Dekster, USA doesn't produce, we import widgets from China. there are no U.S. workers producing widgets.

Individual persons or organizations choose to enter international transactions in expectation of gaining some comparative advantages; their expectations are generally realized. But what's to the advantage of individuals are not necessarily to their nation's net advantages.
Every annual trade deficit nation's expenditures of wealth exceeded the values of their populations' total annual production; (ie. they spent more than they produced).

This is a fact rather than an opinion. It's a fact known and accepted by communities of economists and statisticians throughout the world. Nations' balance of international trade always contributed to surplus nations' and reduced trade deficit nations' gross domestic product, (GDP).
Respectfully, Supposn

 

[Supposn]

The truth is that an idea like import certificates is actually just another form of protectionism. In effect the cost of imports is raised and passed on to the consumer in the form of higher prices, or to the employees in the form of reduced benefits and fewer hours worked. The thought is to make imports less attractive and the end result is that inflation goes up and our standard of living goes down because our paychecks don't go as far as they used to. Think about it: if the cost of the import is X and the price to goes up to X+Y with Y being the added cost of the certificate, then that means the consumer has less money (Y) to spend on something else. And in some cases the import is materials used by an American manufacture to produce a domestic product which now costs more to make and more to buy. So your economic growth took a hit in the effort to reduce the trade deficit.

Task0778, I'm not an isolationist and I'm a proponent of our participating in global trade; but I'm opposed to our great chronic annual trade deficits. Nations' balance of international trade always contributed to surplus nations' and reduced trade deficit nations' gross domestic product, (GDP).

Referring to, Import certificates - Wikipedia , it has been thought through.
USA's annual trade deficits are particularly net detrimental to employees, employees' dependents, and enterprises sensitive to the financial condition of those substantial portions of our population.
Respectfully, Supposn

 

[task0778]

USA's annual trade deficits are particularly net detrimental to employees, employees' dependents, and enterprises sensitive to the financial condition of those substantial portions of our population.

Not necessarily true. Many imports are used as inputs into American manufacturing, thereby benefitting employees, consumers, other suppliers that contribute to that manufacturing and ultimately net economic growth.

I did not find that statement in your Wikipedia link BTW.

 

[Supposn]

Capitalist care about profits they don't care if Susie makes an income that allows her the ability to buy a widget.

Moonglow, regardless of a nation's economic system, (for both socialist or capitalist nations), their balances' of international trade always contributed to surplus nations' and reduced trade deficit nations' gross domestic product, (GDP). Respectfully, Supposn

 

[Supposn]

.

Dekster, USA doesn't produce, we import widgets from China. there are no U.S. workers producing widgets.

Individual persons or organizations choose to enter international transactions in expectation of gaining some comparative advantages; their expectations are generally realized. But what's to the advantage of individuals are not necessarily to their nation's net advantages. ...

Every annual trade deficit nation's expenditures of wealth exceeded the values of their populations' total annual production; (ie. they spent more than they produced). ...
Respectfully, Supposn

Not necessarily true. Many imports are used as inputs into American manufacturing, thereby benefitting employees, consumers, other suppliers that contribute to that manufacturing and ultimately net economic growth.

I did not find that statement in your Wikipedia link BTW.

 

[task0778]

Every annual trade deficit nation's expenditures of wealth exceeded the values of their populations' total annual production; (ie. they spent more than they produced). ...
Respectfully, Supposn

That is not what I replied to in post #10. It is a true statement but says nothing about whether or not a trade deficit is always bad for economic growth. Because it isn't, not always.

 

[Supposn]

That is not what I replied to in post #10. It is a true statement but says nothing about whether or not a trade deficit is always bad for economic growth. Because it isn't, not always.

Task0778, we're discussing nations' annual balances of trade, not individual transactions or enterprises. Regardless of how robust or poor a nation's economy is over the years, if the nation, (as the USA does) experience chronic annual trade deficits, then due to the nation's annual balances of trade, that nation's economy is poorer than otherwise.

Annual trade deficits are ALWAYS net detrimental to their GDP and (unless the nation effectively has full employment,) it's net detrimental to the nation's numbers of jobs and their wage rates.
Respectfully, Supposn

 

[task0778]

Task0778, we're discussing nations' annual balances of trade, not individual transactions or enterprises. Regardless of how robust or poor a nation's economy is over the years, if the nation, (as the USA does) experience chronic annual trade deficits, then due to the nation's annual balances of trade, that nation's economy is poorer than otherwise.

Annual trade deficits are ALWAYS net detrimental to their GDP and (unless the nation effectively has full employment,) it's net detrimental to the nation's numbers of jobs and their wage rates.
Respectfully, Supposn

Nations do not trade with each other; people do. America’s trade deficit with the rest of the world is only the sum of the individual choices made by American citizens. And it is NOT true that a country's trade deficits are always net detrimental to economic growth or to jobs and wages. And GDP is not always an accurate indicator of an economic well-being either. GDP is nothing more than an estimate, and in fact since 1980,the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. The goal of U.S. trade policy should not be to promote exports at the expense of imports, but to maximize the freedom of Americans to trade goods, services, and assets in the global marketplace.

 

[Supposn]

Nations do not trade with each other; people do. America’s trade deficit with the rest of the world is only the sum of the individual choices made by American citizens. And it is NOT true that a country's trade deficits are always net detrimental to economic growth or to jobs and wages. And GDP is not always an accurate indicator of an economic well-being either. GDP is nothing more than an estimate, and in fact since 1980,the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. The goal of U.S. trade policy should not be to promote exports at the expense of imports, but to maximize the freedom of Americans to trade goods, services, and assets in the global marketplace.

Task0778, trade deficit nations' negative annual balances of international trade were ALWAYS net detrimental to their nations' gross domestic product, (GDP).

There are economists and statisticians that believe GDP per capita is not the best indicator of a nation's economic and social well-being; the majority of explanations offered from such doubters were their contentions that trade deficits understated the detriments to their nations' economic and social well-being.
Can you cite many or any credible economists that contend a lesser GDP per capita is beneficial to its nation, or contend that annual trade deficits did not (more than otherwise) reduce their nation's annual GDP? Respectfully, Supposn

 

[task0778]

Task0778, trade deficit nations' negative annual balances of international trade were ALWAYS net detrimental to their nations' gross domestic product, (GDP).

There are economists and statisticians that believe GDP per capita is not the best indicator of a nation's economic and social well-being; the majority of explanations offered from such doubters were their contentions that trade deficits understated the detriments to their nations' economic and social well-being.
Can you cite many or any credible economists that contend a lesser GDP per capita is beneficial to its nation, or contend that annual trade deficits did not (more than otherwise) reduce their nation's annual GDP? Respectfully, Supposn

"There are economists and statisticians that believe GDP per capita is not the best indicator of a nation's economic and social well-being; the majority of explanations offered from such doubters were their contentions that trade deficits understated the detriments to their nations' economic and social well-being."

Show me the reference that says that from a credible economist. I contend that is not true. You are conflating the GDP calculation as an accurate portrayal of a nation's economic growth and well-being. That is not always so. Consider:

During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If US banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the United States, and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold-standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance-of-payment deficits, thus bringing gold back into the country.

But now, in the fiat-money era, balance-of-payments deficits are truly meaningless. For gold is no longer a "balancing item." In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither did dollars "leak" out...

The Nonproblem of the Trade Deficit | Mises Institute

Murray Rothbard referred to the trade deficit as a "pseudoproblem," which also suggests that we shouldn't read too much into the deficit's recent drop.

mises.org

And now a word about the Balance of Payments and trade deficits:

One very important, but almost always overlooked point is that there really is no overall trade deficit (or surplus) for international transactions once we account for both: a) cash flows for goods and services (current account) and b) cash flows for financial assets (capital account). A full accounting for all cash inflows and cash outflows over a certain period for all international trade in goods, services and financial assets in known as a country’s “balance of payments.” And just like a corporate balance sheet for a company, our balance of payments as a country always has to balance once we consider our “current account” (which has been in deficit for many decades) and our “capital account” (which has been in surplus for many decades).

Therefore, any trade deficit for our current account has to be exactly offset with an equal dollar amount of surplus on our capital account. Another way to think about it is to say that our trade deficits for merchandise are always accompanied by a “foreign investment surplus.” In terms of numbers, our recent current account trade deficits of about $450 billion per year are offset by $450 billion in annual capital inflows used to purchase America’s financial assets like corporate stock and bonds, real estate, bank deposits and Treasury securities, and as foreign direct investment in America’s factories and businesses. (see chart above). Therefore, in reality, the trade deficit as most people (mis)understand it doesn’t even really exist, because America’s total trade with the rest of the world is always perfectly balanced once we account for all international transactions for goods, services, investment income, and financial assets.

Beyond the fact that the discussion on the trade deficit is typically incomplete by focusing only on trade flows for goods and services while ignoring trade flows for financial assets, there is a larger issue with the obsession with America’s trade deficit. And that’s the fact that the trade deficit is almost always reported in the media as a sign of America’s economic weakness, when that is not the case at all. After all, the flip-side of the “trade deficit” is an inflow of foreign capital that provides a vital source of financing that fuels capital creation and business expansion in America, which leads to increased future output and employment in the U.S., and a more dynamic and vibrant economy. George Mason University economist Don Boudreaux expressed it this way: “To lament America’s trade deficit is to lament the fact that foreigners are investing in America. And that seems very odd.”

Worried About Trade Deficits? Don't, They're 'job-generating Foreign Investment Surpluses for a Better America'

In a Forbes article today (“Donald Trump’s Trade Policies: Blessing Or Curse?“) Forbes contributor Stuart Anderson features comments from Mercatus Center Senior Fellow Dan Griswold and me as he tries to answer the question “What do economists think of Donald Trump’s proposed trade policies?”...

www.aei.org

You asked for a credible economist, I give you Don Boudreaux. When an American business buys an import, they pay in US dollars. We get stuff and they get paid in dollars, that's how it works. So what do they do with those dollars? They invest in our companies and buy our treasuries, otherwise known as our national debt. Foreign investment is in effect helping our economy grow, and that is why Investment (I) is part of the GDP calculation. So, our trade deficit is basically a wash; we buy stuff and they invest the US dollars we paid them with into our economy.

 

[task0778]

If USA produces less goods and service products, (ie. reduces our GDP), it is particularly detrimental to our numbers of jobs

Not necessarily. Per the St Louis Fed:

Do trade deficits lead to declining manufacturing? Not necessarily. Of course, if a nation relies heavily on imported manufactured goods and exports only raw materials, then persistent trade deficits may lead to declining employment in manufacturing. This often occurs in developing countries with low productivity growth in manufacturing.

The more likely causes of declining U.S. manufacturing employment are rapid technology growth and improved labor productivity. This is similar to what happened in the U.S. agricultural sector—agricultural employment used to absorb 80 percent of the labor force in the 19th century, but it now requires less than 2 percent of the labor force, thanks to rapid improvement in the productivity of agricultural production.

Therefore, the declining manufacturing employment in the U.S. may have little to do with U.S. trade deficits. In fact, data show the downward trend of manufacturing employment in the U.S. started in the 1960s (see Figure 3) as labor productivity continuously rose in the manufacturing sector; it has increased sevenfold in the U.S. since 1960.

Shifting U.S. Jobs

Indeed, using a calibrated dynamic stochastic general equilibrium model, economists Timothy Kehoe, Kim Ruhl and Joseph Steinberg showed that 85 percent of the employment reduction in the goods manufacturing sector from 1992 to 2012 was due to the rapidly rising labor productivity in that sector, and only the remaining 15 percent was due to rising U.S. trade deficits with the rest of the world.

Understanding the Roots of the U.S. Trade Deficit | St. Louis Fed

The rise of the dollar as an international reserve currency and a shift in comparative advantage are key economic changes driving the large U.S. trade deficit.

www.stlouisfed.org

 

[Toddsterpatriot]

"There are economists and statisticians that believe GDP per capita is not the best indicator of a nation's economic and social well-being; the majority of explanations offered from such doubters were their contentions that trade deficits understated the detriments to their nations' economic and social well-being."

Show me the reference that says that from a credible economist. I contend that is not true. You are conflating the GDP calculation as an accurate portrayal of a nation's economic growth and well-being. That is not always so. Consider:

During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If US banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the United States, and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold-standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance-of-payment deficits, thus bringing gold back into the country.

But now, in the fiat-money era, balance-of-payments deficits are truly meaningless. For gold is no longer a "balancing item." In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither did dollars "leak" out...

The Nonproblem of the Trade Deficit | Mises Institute

Murray Rothbard referred to the trade deficit as a "pseudoproblem," which also suggests that we shouldn't read too much into the deficit's recent drop.

mises.org

And now a word about the Balance of Payments and trade deficits:

One very important, but almost always overlooked point is that there really is no overall trade deficit (or surplus) for international transactions once we account for both: a) cash flows for goods and services (current account) and b) cash flows for financial assets (capital account). A full accounting for all cash inflows and cash outflows over a certain period for all international trade in goods, services and financial assets in known as a country’s “balance of payments.” And just like a corporate balance sheet for a company, our balance of payments as a country always has to balance once we consider our “current account” (which has been in deficit for many decades) and our “capital account” (which has been in surplus for many decades).

Therefore, any trade deficit for our current account has to be exactly offset with an equal dollar amount of surplus on our capital account. Another way to think about it is to say that our trade deficits for merchandise are always accompanied by a “foreign investment surplus.” In terms of numbers, our recent current account trade deficits of about $450 billion per year are offset by $450 billion in annual capital inflows used to purchase America’s financial assets like corporate stock and bonds, real estate, bank deposits and Treasury securities, and as foreign direct investment in America’s factories and businesses. (see chart above). Therefore, in reality, the trade deficit as most people (mis)understand it doesn’t even really exist, because America’s total trade with the rest of the world is always perfectly balanced once we account for all international transactions for goods, services, investment income, and financial assets.

Beyond the fact that the discussion on the trade deficit is typically incomplete by focusing only on trade flows for goods and services while ignoring trade flows for financial assets, there is a larger issue with the obsession with America’s trade deficit. And that’s the fact that the trade deficit is almost always reported in the media as a sign of America’s economic weakness, when that is not the case at all. After all, the flip-side of the “trade deficit” is an inflow of foreign capital that provides a vital source of financing that fuels capital creation and business expansion in America, which leads to increased future output and employment in the U.S., and a more dynamic and vibrant economy. George Mason University economist Don Boudreaux expressed it this way: “To lament America’s trade deficit is to lament the fact that foreigners are investing in America. And that seems very odd.”

Worried About Trade Deficits? Don't, They're 'job-generating Foreign Investment Surpluses for a Better America'

In a Forbes article today (“Donald Trump’s Trade Policies: Blessing Or Curse?“) Forbes contributor Stuart Anderson features comments from Mercatus Center Senior Fellow Dan Griswold and me as he tries to answer the question “What do economists think of Donald Trump’s proposed trade policies?”...

www.aei.org

You asked for a credible economist, I give you Don Boudreaux. When an American business buys an import, they pay in US dollars. We get stuff and they get paid in dollars, that's how it works. So what do they do with those dollars? They invest in our companies and buy our treasuries, otherwise known as our national debt. Foreign investment is in effect helping our economy grow, and that is why Investment (I) is part of the GDP calculation. So, our trade deficit is basically a wash; we buy stuff and they invest the US dollars we paid them with into our economy.

Using his "logic", Japan, which produces about 3000 barrels of oil a day and imports about 3.2 million barrels of oil a day, would have a larger GDP if they didn't import any oil.

 

[task0778]

Using his "logic", Japan, which produces about 3000 barrels of oil a day and imports about 3.2 million barrels of oil a day, would have a larger GDP if they didn't import any oil.

True. I believe about half of our imports are necessary materials used in manufacturing stuff: oil, steel, rubber, etc. The cost of those imports is exceeded by the value of the finished product that is produced and sold. The other half is finished products like shirts and shoes that are cheaper to buy here than domestically produced shirts and shoes, BUT the lower price allows consumers to buy more stuff and that improves our standard of living. The consumer wins, and so does the merchant and the importer, and everybody else involved in bringing the imported product to the market.

Now - what does the importer (foreign company) do with their US dollars received? Mostly they invest it back into the US economy or they buy US Gov't Bonds and Treasuries. I'm not seeing anything detrimental here to our economy. Where's the problem?