Actually they don't usually get SPENT in the USA.
Typically Petrodollars are returned to WESTERN banks in return for sourverign DEBT INSTRUMENTS.
Trade deficits are ALWAYS detrimental to their nationsÂ’ GDPs.
- Thread starter Supposn
- Start date
Actually they don't usually get SPENT in the USA.
Typically Petrodollars are returned to WESTERN banks in return for sourverign DEBT INSTRUMENTS.
- Thread starter
- #102
Editec, if the U.S. dollars are not spent to purchase U.S, goods or service products or invested on behalf of an enterprise that will use them to purchase U.S. products, they do not contribute to USAÂ’s GDP.
Respectfully, Supposn
Toddsterpatriot
Diamond Member
Trade deficits cannot contribute anything to their nationÂ’s GDP,
You claimed they were always detrimental.
I showed they are not.
Toddsterpatriot
Diamond Member
What do the sellers of the sovereign debt do with the dollars?
- Thread starter
- #105
Toddster Patriot, (more than otherwise) a trade deficit is ALWAYS detrimental to a nationÂ’s GDP.
But yes, you are correct. I can conceive an extremely improbable scenario where a nation's trade deficit would theoretically not be absolutely detrimental to the GDP.
If a nation had a trade deficit and the sum of all of its imports plus the additional production supporting costs not reflected within the prices of the imports, were exceeded by the nationÂ’s GDP, which would be a case of where a trade deficit was not detrimental to the nationÂ’s GDP.
Within the last two or three centuries, I doubt if any industrial or modern nation has experienced such a “perfect storm”; but if it has or will occur, I don’t know how we would be able to recognize it.
Trade deficits cannot contribute anything to their GDP. Annual trade deficits certainly imply (more than otherwise) net lost jobs due to the trade deficits.
If a nation reduces their rate of foreign product purchases during a given period, .that increases the GDPÂ’s rate of growth for that period (more than otherwise).
If a nationÂ’s total sales of domestic produced products exceeds their foreign purchases during any given period that further increase both the rate of growth and the actual amount of GDP (more than otherwise) during the period.
The opposite results are achieved if the nation increases rather than reduces their rates of foreign products purchased during a given period.
Respectfully, Supposn
No, this is not true.
Japan has run a trade surplus through most of this century and their economy has sucked. Their deficit of the last several months is probably largely due to the tsunami.
Toddsterpatriot
Diamond Member
Toddster Patriot, (more than otherwise) a trade deficit is ALWAYS detrimental to a nationÂ’s GDP.
I already showed how it isn't.
But yes, you are correct. I can conceive an extremely improbable scenario where a nation's trade deficit would theoretically not be absolutely detrimental to the GDP.
My example wasn't improbable.
I take $1 billion out of the bank and buy $1 billion of Panamanian coffee and import it into the United States.
My purchase did not hurt American GDP. Not one bit. Not even theoretically.
Now let's say I process the coffee and sell it in my coffee shops for $4 billion.
Look at that, I increased US GDP by $4 billion. My $1 billion trade deficit actually helped US GDP.
I already showed how it isn't.
But yes, you are correct. I can conceive an extremely improbable scenario where a nation's trade deficit would theoretically not be absolutely detrimental to the GDP.
My example wasn't improbable.
I take $1 billion out of the bank and buy $1 billion of Panamanian coffee and import it into the United States.
My purchase did not hurt American GDP. Not one bit. Not even theoretically.
Now let's say I process the coffee and sell it in my coffee shops for $4 billion.
Look at that, I increased US GDP by $4 billion. My $1 billion trade deficit actually helped US GDP.
itfitzme
Silver Member
I've been studying the OP so that I am sure I am understanding it properly. Sometimes, it's a matter of the right amount of sleep. Another post helped clarify a possible meaning. With this help, I start by restating the OPs post such that he can verify I am understanding and representing it properly .
This helped as, in the end, it seems that the difficulty lies in being able to connect the concept to the available measures in a way that eliminated conflagrating factors. Unfortunately, it can't. When defined by the available measures, and in practice, if the effect exists it is aligned in a manner that makes it appear as if it is none existent. It is also not easily extracted from the available data. For all intents and purposes, it is as if it isn't there.
I went after a scatter plot which turns out to be in line with one comment. Scanning over them, I think I caught another that rearranged the GDP=C+G+I+(X-M) in a way that clarified it.
I think I've just managed to validated other posts.
The following is an attempt to put it in some other words and to formalize the meaning.
Hypothesis:
At best, I can say that this is not strictly true. It may be that trade deficits sometimes are detrimental to their nations' GDPs. This will be clarified.
Formally, this is that, for GDP=C+G+I+(X-M), a negative X-M reduces the effective national output compared to a positive X-M in that there is a multiplier effect of exports. An increase in exports increases GDP by more than just the directly measurable output of the exports. As such, GDP with the existence of imports is relatively less by comparison. There is some sense in this.
For clarity, E = C+G+I and TD = (X-M) {This is actually the beginning of an error. See DSGE post earlier re E containing international products. It will suffice for lack of any other way to differentiate things. )
For negative TD=X-M, GDP is reduced. That is, given that GDP1 = E1+TD1 | TD1 > 0 and GDP2 = E2+TD2 | TD2 < 0 , the hypothesis is that GDP1(E1,TD1 | TD1 > 0) > GDP2(E2,TD2,| TD2 < 0) Even more so, E1(TD1 > 0) > E2(TD2 < 0).
(Yes, put that into a sentence, it's the only way. The formal definition forces certain rules to it. It all assures all relationships are perfectly clear. Few can just read it like a story. I can't.)
It says that the domestic output for internal consumption is greater for a net export then it is for a net import. By extension, employment for domestic production due to support services is lessened. (per DSGE, E isn't just domestic production though. So we are already in error here).
Employment, unfortunately, isn't included in this formal definition. This is the conflagrating factor that fuzzies this thing out. Figuring out how to isolate employment is the difficulty and the whole point. It's a shame, because in the end, I'm stuck.
Still, if you follow me on this, there is still something to be said.
GDP only counts final goods.
The final product doesn't include "externalities".
For lack of another word, I am using "externality" to refer to services and products that are utilized in the production of a product but not directly purchased. These are, basically, "positive externalities".
For instance, education accumulated by an employee contributes to the value of the product. It is not a bill of material cost though it is part of the employees salary. The cost of repairing the transportation network adds value to the product in supporting delivery to the final destination. This cost is not included in the bill of material costs though it is paid for by taxes, requires employment of road workers and does increase final goods for materials like asphalt.
Having said this, it hints of a more formal expression. It also begins to stick some of those "externalities" into the proper place. Consider a technical product that is produced for export only. To product it requires educated workers and those workers purchase education. The cost of that education is returned to them in their increased salary. The cost of that education is recorded in GDP as a final good. The cost of that education is also included in M.
Costs, including labor, and materials of intermediate goods are included in the final good price and material
"Externalities" add value to the final product without adding cost
"Externalitie"s are included in the GDP but that portion of the "externality" that contributes to X are not included in X
The income earned by workers producing products increases demand for other products.
GDP is reduced by -M because GDP is a measure of production, not money spent. As well, imports may be intermediate goods and is not to be counted as part of the final product. This is similar to the concept of counting only final products as the value and cost of intermediate products is included in the final product.
In conclusion, (X - M) has a multiplier effect in stimulating "externalities"
So there is the hypothesis.
We have the complementary processes of deduction and empirical evidence.
The OP's discussion is a deductive presentation. Is is supported empirically?
A difficulty in demonstrating this empirically is that population and efficiency continue to increase. Employment-Population ratio also varies. GDP can be normalized by dividing by population or employment which will provide some sense of the increase. The idea of dividing by employment is that it is a proxy for efficiency. Unfortunately, dividing by employment takes out the trade contribution in that the trade is hypothesized to increase employment. There is no alternate measure of efficiency with which to factor out efficiency contribution so that only the trade contribution becomes visible.
Let's consider then doing a linear regression on net exports and GDP in real dollar per capita. GDP in real dollar per capita is a bit of a proxy for standard of living.
We could do RGDP/(pop*emp). This produces a measure that is normalized for both though it suffers from a) the lack of uniqueness b) not being very intuitive.
Finding a good combination of variables that have only the "externality effect" may not be possible.
One should be careful with causality. Does the increase in GDP, and therefore consumption due to increased employment, drive the demand for imports? Or is it that the purchase of imports drives the GDP by holding it down due to reduced employment, per the hypothesis?
(On a side note, I think it is unbiased to state the causalities this way. I am a bit biased in not saying that an increase in imports drives GDP or national production. That's a bit easier then causal relationships between taxes and government spending.)
Even more so, is it both such that they work in opposite directions?
Having considered doing a linear regression, the first order of business is a scatter plot of the data.
Here is the scatter plot of GDP vs Net Exports. It is RGDP per capita vs Net Exports per capita. This is all years from 1929 to 2010. What does it show?
It shows GDP increasing as imports increase and imports increasing with GDP. Notice that it is not clearly straight, but a bit curved.
For context, here is the GDP and Exports per year, from 1929 through 2010. The scatter plot is easier to see the relationship.
For the sake of connecting it to a reference, compare it to this from a previous post
Which is a zoom on the full year plot above and detailed with quarterly data.
Do they support each other? Yes
Still, there is some sense of the logic of the hypothesis. It is deductively appropriate, that net exports cause supporting services in a sort of multiplier. That is the whole concept behind the government multiplier and stimulus spending. The multiplier effect isn't unique to the government. There is no argument that if Apple builds a factory in a town, the towns output increases by more then just the factory output.
I find a few issues to be considered.
A minor point, is that the externality of education is included in the salary of the worker and therefore is included in the price of the export and domestic production. This is a bit minor though in that, in the final end, the idea that the production of an export decreases potential employment.
More importantly are a series of three parts of the process of deduction.
A first is that of ensuring the absolute physicality of the concepts and connectivity in the deduction.
A second one, an extension of the first, is making sure that measures capture the physical properties.
A third is to ensure that the available measures of the elements, that are being related, properly isolate the physical property of interest without conflagrating extraneous factors.
Even when all this is done, the fifth is that of scale. There are cause and effect relationships that, while entirely true, are not of a magnitude that is large enough to bear out in practice. Other relationships simply overpower it. This is as true in physics as in economics.
{Back to that error for the sake of having something to work with}
With these considerations, expanding on the formal attempt of an export multiplier effect, that GDP1(E1,TD1 | TD1 > 0) > GDP2(E2,TD2,| TD2 < 0), a couple of considerations come to mind.
One is that the formal relationship presented really need to be E1(TD1 | TD1 > 0) > E2(TD2| TD2 < 0). In essence, E1=GDP1-TD1, E2=GDP2-TD2 and we are saying that
E(GDP-TD|TD>0) > E(GDP-TD|TD<0)
If I've done this correctly, the relationship cannot hold. For the same GDP, E must be smaller for a larger TD.
Why is this a different result then Supposn, given that we both start with the same equation? Because, I am holding GDP constant and considering the trade balance as TD = X-M. This is a more operational definition in terms of the multiplier factor and it's detractor due to a trade deficit. This is where I ended up in trying to formalize it. As I got further in the thread, I see he defines it as E' = GDP +M.
But, we are in no better position as CGI still contains international products. And this becomes the issue, being able to practically differentiate purely domestic production. Without it, it's not possible to define the multiplier effect that we are trying to isolate as being "crowded out" by a lack of domestic production.
Now it may be that this idea of a multiplier affect remains valid, just that we are back to the deduction process above, defining the proper elements and connectivity to get employment into it, specifically, in such a manner that it differentiates out the difference between the increase in domestic output for domestic consumption due to just the net exports and employment.
There is a difference between full employment and high unemployment.
During recessions, imports fall off. So a lack of a multiplier effect due to imports is lessened during increased unemployment periods.
During full output, any multiplier effect is supporting domestically consumed products which is at full consumption. Imports are then no detracting from the multiplier effect but are just adding on top of the consumption.
If the formal relationship can be modified to highlight the multiplier is not entirely clear. If it could be, then the significance of it during periods of unemployment could be highlighted.
It still may be that there is a detracting factor but that we need to be able to somehow account for the employment factor. Supposing the multiplier exists, as unemployment rises, GDP decreases and imports decrease proportionally. So, proportionally, the detractor of imports becomes lessened. If it exists, this multiplier effect cannot be extracted from GDP, unemployment, and imports. And still, if it exists, though to a lesser extent, the idea suggests that GDP would be proportionally higher without it. Still, without a formal definition I am getting the impression that it doesn't seem so.
At full employment, there is no detractor because imports are simply increasing standard of living. At minimum employment, there are no imports so there is no detractor. This means that between minimum employment (as measured by no imports), this detractor must rise then fall again to zero. This makes the multiplier itself not constant or offset by some other factor..
This is possible, that there is some sweet spot where it is the most detracting. If so, then at that point, moving imports to domestic production would bump GDP up. But to ferret this out truly requires a formal definition which requires somehow distinguishing between the proportion of the domestic product that is the result of the multiplier.
In practice, it just goes away at both ends. The scatter plot is not a straight line. This suggests that, in fact, there is something more going on then simply imports being directly proportional to GDP and vis a vis. It may be that the curved shape is a result of the OPs suggested effect. Imports start out at out at zero and do not begin to increase until a certain GDP per capita has been reached. Then, as GDP increases further, imports begin to increase with GDP and almost have a curve to them. Unfortunately, the variance is a bit to big to really tell for sure.
Still, without proof, I say that this multiplier is true but offset by the simpler increase in imports due to an increase in income.
At this point, it's just getting too complicated in that, in practice, it just seems to go away at both ends anyways. In practice it would require dynamic tariffs to extract out some additional percentage of employment and GDP. There is a concept in econometrics called statistical significance.
What the concept of statistical significance misses in practical importance. Something can be statistically significant but not practically important. And, in many real world settings, if you have to do the detailed calculation of p-value to find the statistical significance, it isn't of practical importance.
This helped as, in the end, it seems that the difficulty lies in being able to connect the concept to the available measures in a way that eliminated conflagrating factors. Unfortunately, it can't. When defined by the available measures, and in practice, if the effect exists it is aligned in a manner that makes it appear as if it is none existent. It is also not easily extracted from the available data. For all intents and purposes, it is as if it isn't there.
I went after a scatter plot which turns out to be in line with one comment. Scanning over them, I think I caught another that rearranged the GDP=C+G+I+(X-M) in a way that clarified it.
I think I've just managed to validated other posts.
The following is an attempt to put it in some other words and to formalize the meaning.
Hypothesis:
At best, I can say that this is not strictly true. It may be that trade deficits sometimes are detrimental to their nations' GDPs. This will be clarified.
Formally, this is that, for GDP=C+G+I+(X-M), a negative X-M reduces the effective national output compared to a positive X-M in that there is a multiplier effect of exports. An increase in exports increases GDP by more than just the directly measurable output of the exports. As such, GDP with the existence of imports is relatively less by comparison. There is some sense in this.
For clarity, E = C+G+I and TD = (X-M) {This is actually the beginning of an error. See DSGE post earlier re E containing international products. It will suffice for lack of any other way to differentiate things. )
For negative TD=X-M, GDP is reduced. That is, given that GDP1 = E1+TD1 | TD1 > 0 and GDP2 = E2+TD2 | TD2 < 0 , the hypothesis is that GDP1(E1,TD1 | TD1 > 0) > GDP2(E2,TD2,| TD2 < 0) Even more so, E1(TD1 > 0) > E2(TD2 < 0).
(Yes, put that into a sentence, it's the only way. The formal definition forces certain rules to it. It all assures all relationships are perfectly clear. Few can just read it like a story. I can't.)
It says that the domestic output for internal consumption is greater for a net export then it is for a net import. By extension, employment for domestic production due to support services is lessened. (per DSGE, E isn't just domestic production though. So we are already in error here).
Employment, unfortunately, isn't included in this formal definition. This is the conflagrating factor that fuzzies this thing out. Figuring out how to isolate employment is the difficulty and the whole point. It's a shame, because in the end, I'm stuck.
Still, if you follow me on this, there is still something to be said.
GDP only counts final goods.
The final product doesn't include "externalities".
For lack of another word, I am using "externality" to refer to services and products that are utilized in the production of a product but not directly purchased. These are, basically, "positive externalities".
For instance, education accumulated by an employee contributes to the value of the product. It is not a bill of material cost though it is part of the employees salary. The cost of repairing the transportation network adds value to the product in supporting delivery to the final destination. This cost is not included in the bill of material costs though it is paid for by taxes, requires employment of road workers and does increase final goods for materials like asphalt.
Having said this, it hints of a more formal expression. It also begins to stick some of those "externalities" into the proper place. Consider a technical product that is produced for export only. To product it requires educated workers and those workers purchase education. The cost of that education is returned to them in their increased salary. The cost of that education is recorded in GDP as a final good. The cost of that education is also included in M.
Costs, including labor, and materials of intermediate goods are included in the final good price and material
"Externalities" add value to the final product without adding cost
"Externalitie"s are included in the GDP but that portion of the "externality" that contributes to X are not included in X
The income earned by workers producing products increases demand for other products.
GDP is reduced by -M because GDP is a measure of production, not money spent. As well, imports may be intermediate goods and is not to be counted as part of the final product. This is similar to the concept of counting only final products as the value and cost of intermediate products is included in the final product.
In conclusion, (X - M) has a multiplier effect in stimulating "externalities"
So there is the hypothesis.
We have the complementary processes of deduction and empirical evidence.
The OP's discussion is a deductive presentation. Is is supported empirically?
A difficulty in demonstrating this empirically is that population and efficiency continue to increase. Employment-Population ratio also varies. GDP can be normalized by dividing by population or employment which will provide some sense of the increase. The idea of dividing by employment is that it is a proxy for efficiency. Unfortunately, dividing by employment takes out the trade contribution in that the trade is hypothesized to increase employment. There is no alternate measure of efficiency with which to factor out efficiency contribution so that only the trade contribution becomes visible.
Let's consider then doing a linear regression on net exports and GDP in real dollar per capita. GDP in real dollar per capita is a bit of a proxy for standard of living.
We could do RGDP/(pop*emp). This produces a measure that is normalized for both though it suffers from a) the lack of uniqueness b) not being very intuitive.
Finding a good combination of variables that have only the "externality effect" may not be possible.
One should be careful with causality. Does the increase in GDP, and therefore consumption due to increased employment, drive the demand for imports? Or is it that the purchase of imports drives the GDP by holding it down due to reduced employment, per the hypothesis?
(On a side note, I think it is unbiased to state the causalities this way. I am a bit biased in not saying that an increase in imports drives GDP or national production. That's a bit easier then causal relationships between taxes and government spending.)
Even more so, is it both such that they work in opposite directions?
Having considered doing a linear regression, the first order of business is a scatter plot of the data.
Here is the scatter plot of GDP vs Net Exports. It is RGDP per capita vs Net Exports per capita. This is all years from 1929 to 2010. What does it show?
It shows GDP increasing as imports increase and imports increasing with GDP. Notice that it is not clearly straight, but a bit curved.
For context, here is the GDP and Exports per year, from 1929 through 2010. The scatter plot is easier to see the relationship.
For the sake of connecting it to a reference, compare it to this from a previous post
Which is a zoom on the full year plot above and detailed with quarterly data.
Do they support each other? Yes
Still, there is some sense of the logic of the hypothesis. It is deductively appropriate, that net exports cause supporting services in a sort of multiplier. That is the whole concept behind the government multiplier and stimulus spending. The multiplier effect isn't unique to the government. There is no argument that if Apple builds a factory in a town, the towns output increases by more then just the factory output.
I find a few issues to be considered.
A minor point, is that the externality of education is included in the salary of the worker and therefore is included in the price of the export and domestic production. This is a bit minor though in that, in the final end, the idea that the production of an export decreases potential employment.
More importantly are a series of three parts of the process of deduction.
A first is that of ensuring the absolute physicality of the concepts and connectivity in the deduction.
A second one, an extension of the first, is making sure that measures capture the physical properties.
A third is to ensure that the available measures of the elements, that are being related, properly isolate the physical property of interest without conflagrating extraneous factors.
Even when all this is done, the fifth is that of scale. There are cause and effect relationships that, while entirely true, are not of a magnitude that is large enough to bear out in practice. Other relationships simply overpower it. This is as true in physics as in economics.
{Back to that error for the sake of having something to work with}
With these considerations, expanding on the formal attempt of an export multiplier effect, that GDP1(E1,TD1 | TD1 > 0) > GDP2(E2,TD2,| TD2 < 0), a couple of considerations come to mind.
One is that the formal relationship presented really need to be E1(TD1 | TD1 > 0) > E2(TD2| TD2 < 0). In essence, E1=GDP1-TD1, E2=GDP2-TD2 and we are saying that
E(GDP-TD|TD>0) > E(GDP-TD|TD<0)
If I've done this correctly, the relationship cannot hold. For the same GDP, E must be smaller for a larger TD.
Why is this a different result then Supposn, given that we both start with the same equation? Because, I am holding GDP constant and considering the trade balance as TD = X-M. This is a more operational definition in terms of the multiplier factor and it's detractor due to a trade deficit. This is where I ended up in trying to formalize it. As I got further in the thread, I see he defines it as E' = GDP +M.
But, we are in no better position as CGI still contains international products. And this becomes the issue, being able to practically differentiate purely domestic production. Without it, it's not possible to define the multiplier effect that we are trying to isolate as being "crowded out" by a lack of domestic production.
Now it may be that this idea of a multiplier affect remains valid, just that we are back to the deduction process above, defining the proper elements and connectivity to get employment into it, specifically, in such a manner that it differentiates out the difference between the increase in domestic output for domestic consumption due to just the net exports and employment.
There is a difference between full employment and high unemployment.
During recessions, imports fall off. So a lack of a multiplier effect due to imports is lessened during increased unemployment periods.
During full output, any multiplier effect is supporting domestically consumed products which is at full consumption. Imports are then no detracting from the multiplier effect but are just adding on top of the consumption.
If the formal relationship can be modified to highlight the multiplier is not entirely clear. If it could be, then the significance of it during periods of unemployment could be highlighted.
It still may be that there is a detracting factor but that we need to be able to somehow account for the employment factor. Supposing the multiplier exists, as unemployment rises, GDP decreases and imports decrease proportionally. So, proportionally, the detractor of imports becomes lessened. If it exists, this multiplier effect cannot be extracted from GDP, unemployment, and imports. And still, if it exists, though to a lesser extent, the idea suggests that GDP would be proportionally higher without it. Still, without a formal definition I am getting the impression that it doesn't seem so.
At full employment, there is no detractor because imports are simply increasing standard of living. At minimum employment, there are no imports so there is no detractor. This means that between minimum employment (as measured by no imports), this detractor must rise then fall again to zero. This makes the multiplier itself not constant or offset by some other factor..
This is possible, that there is some sweet spot where it is the most detracting. If so, then at that point, moving imports to domestic production would bump GDP up. But to ferret this out truly requires a formal definition which requires somehow distinguishing between the proportion of the domestic product that is the result of the multiplier.
In practice, it just goes away at both ends. The scatter plot is not a straight line. This suggests that, in fact, there is something more going on then simply imports being directly proportional to GDP and vis a vis. It may be that the curved shape is a result of the OPs suggested effect. Imports start out at out at zero and do not begin to increase until a certain GDP per capita has been reached. Then, as GDP increases further, imports begin to increase with GDP and almost have a curve to them. Unfortunately, the variance is a bit to big to really tell for sure.
Still, without proof, I say that this multiplier is true but offset by the simpler increase in imports due to an increase in income.
At this point, it's just getting too complicated in that, in practice, it just seems to go away at both ends anyways. In practice it would require dynamic tariffs to extract out some additional percentage of employment and GDP. There is a concept in econometrics called statistical significance.
What the concept of statistical significance misses in practical importance. Something can be statistically significant but not practically important. And, in many real world settings, if you have to do the detailed calculation of p-value to find the statistical significance, it isn't of practical importance.
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itfitzme
Silver Member
A science is defined by the practice of the scientific method. In medicine, there is the science of human biology and the practice of medicine. Science does not have answers until it does. The practice must have an answer, even when it doesn't. Blood letting was never a scientifically proven method. It was a medical practice.
One should not confuse political economics with the science of normative economics. Nor should one confuse Ron Paul with Adam Smith. The science of economics, and it's theories, are objective, born out of observation of the natural world of economies. The observations and conclusions are limited by the circumstances of the times.
I can assure you, having studies electronics, economics, and psychology, that as sciences, they are all sciences.
Physics has been "child's play" by comparison to psychology and economics. It is only now getting to the point where it is as difficult as economics and psychology. It now must rely heavily on theoretical physics to guide the experiments which then create gigabytes of data that has to be analyzed statistically to find that tiny little effect buried in the noise.
There certainly are to many variables in terms of factors, if we are after a complete accurate and precise prediction of the economy. It is that the full equation of the economy is M V = QP where, in that summation on the right, each of those PQs represents each individual company in every single market. The PQ is the supply and demand equilibrium point for each. And the relationship of supply and demand is on two definable curves that can shift independently. The factors that affect each of these are definable. Supply curves are easily definable as they are the result of production constraints. Demand curves are harder in that they are based on the consumer willingness to pay. The curves themselves are tied together up the vertical chain of markets. Vertical market chains interlink. And at the end product, they are interconnected by the consumer. It is the inter connectivity that is overwhelming. Climate science is easier because CO2 molecules are well behaved by comparison to economic agents. There are, in the us, over 360 million economic agents.
In spite of this, individual markets and individual behaviors can be observed. In a statistical analysis, numerous similar systems can be analyzed and the natural process defined. And, as in signal processing, thermodynamics, and even mechanical dynamics, the random variations are manageable as noise in the same manner as variability friction or the random fluctuations of the universe are handled.
The process becomes one of observation, formation of a hypothesis, then testing of the hypothesis. Like the discovery of vulcanized rubber, it's all perfectly scientific. And like the methodology used by Dr. House, on the popular television show, it is perfectly systematic.
If economics and psychology could plug that many sensors into a human being or an economy and then analyzes the same reams of data, it would be well on it's way to answering questions that must wait until enough decades have passed to find a natural experiment.
It just seems subjective when we only see politics part.
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itfitzme
Silver Member
This is an interesting thread, a great read. Here is one more, and shorter,
One problem with the arguments is that they assume that there is only one effect. And they suppose that proving one negates the other. There are two, or three, affects that counteract each other. This is typical in many situations.
The more I read the conversation with that follows, the more it becomes clear that there lacks a proper viable operational definition. That's okay, it's a *****.
And some points have been well stated by others in clarify things. CGI includes international products. "I bought $1 billion worth of coffee from Panama. I paid for my purchase with money from my checking account." and "How can a trade deficit be detrimental to GDP. If we buy more and more from China it merely means they have more and more dollars to spend here. Total dollars spent here stay the same and then so does GDP so no trade deficit is possible in reality."
The first point defines the second. GDP is given by GDP = C + G + I + ( X - M ). Buying $1 billion in coffee from Panama is counted in C as consumption and in M as imports. They cancel. GDP remains the same.
If we do C + G + I =GDP - (X - M), we up C and up M at the same time. Getting something that represents the intended concept may not be possible.
The third point is interesting but there is that whole money loop. We buy from China. China has $1 million. They exchange it for Renminbi with their central bank. Their central bank buys t-bill. The US Treasury uses this against the government spending with is a deficit. The money stays in circulation. That doesn't seem to directly address GDP. They still own T-bills and eventually cash them in. They have money to burn so they buy the Port of Chicago.
There is the problem of an operational definition of "Trade deficits are ALWAYS detrimental to their nationsÂ’ GDPs." The key word being "detrimental" and the question being "detrimental in what way?" The other issue being that the intent isn't detrimental to "GDP" it is detrimental to employment, really. And detrimental then to national production but not consumption.
"Detrimental" presupposes a causal relationship. It is saying that the trade deficit proportionally reduced the GDP. The question then becomes "how"?
What is apparent is that the causal relationship is that an increasing domestic GDP drives the demand for imports. I am biased that way. Clearly the imports do not drive the GDP. (or do they?)
Now, having defined the independent variable as being the GDP and the dependent variable as being the imports, then a mechanism must be defined and isolated in a feedback loop if one is to present a reverse causal effect of a multiplier effect detractor.
I would like to rephrase the hypothesis in terms of a process.
In terms of the effects, one is that, as GDP rises and employment increases, demand for product increases. All other things being equal, the demand for imports also increases.
At the same time, any production has a local multiplier effect. No one doubts that when Microsoft builds a facility in a city, the total output for that city increases by more then just the Microsoft output. One must be careful because this is an open system and the US economy is a closed system. But I think we can agree that the increase in production of an isolated good has an endogenous effect of increasing ancillary support services such that GDP increases by more then the isolated good.
Stated in terms of the thread, this second effect is that as imports increase, domestic production for domestic consumption is held back compared to what it might otherwise have been without the imports.
The problem with the way this second affect is stated. It is stated against something that didn't happen. And, unfortunately, unless we can compare periods of time that did and did not have tariffs, there is no "didn't happen" to compare to.
Here is the thing stated without the unknown "didn't happen" in it.
Initially, as GDP increases, there is no significant demand for imports because national labor is readily and cheaply available. As GDP increases, demand for goods increases. The marginal cost of labor increases as well. This makes the price of imported goods attractive and the demand for imported goods also increases. At full employment, domestic production is railed. With the demand for goods remaining high, it continues to increases the demand for imports increases.
In this description, there is no comparison to if imports didn't exist. The initial definition of the process cannot be defined that way.
The concept, while valid, isn't applicable to deductive reasoning directly. The concept is that imports create a detractor by offsetting the domestic production multiplier effect.
If there is such an effect and it can be put into the operational definition, an equation, only then can that factor be be isolated to see what it does. The detractor doesn't really exist in nature. It's more of an artifact of our thinking, a hole where something could be.
There are methods to define holes, but they are not particularly appealing initially. In physics, the lack of an electron in a latice is a hole and can be defined as if it was an object. But it exists against a measurable background of neutral charge.
That's part of the hichup in the thread discussion.
If the multiplier effect can be inserted, it must include some measure of employment level compared to full employment and some baseline for efficiency. Otherwise, we can't normalize between time periods. We can factor out population because we have an independent measure. But efficiency is a bit trickier in that it is basically GDP/employment and GDP is already one of our dependent variables. We can't use GDP/employment as an independent variable because it becomes self referencing. We must define some "independent baseline" for production efficiency to even get to the other thing, the secondary support service multiplier.
Lastly, though the OP refereed to it as detrimental to GDP, the intent was employment. The dependent variable is really employment. We still have that problem of defining efficiency as GDP/employment. Changing the dependent variable from GDP to employment doesn't change the issue. It's still self referencing. This can only be solved by having an independent baseline for what employment would be with no imports. Employment runs into that marginal return on labor issue as GDP and employment rise. It runs into that efficiency issue that is either a function of time or of GDP. It's difficult to say because GDP has increase with time so GDP and efficiency are both a function of time with no more fundamental variable to define them with.
The discussion must reach an impasse because of these issues. The OPs concept cannot be described given the available measures and when defined in terms of the available measures, the concept is invalidated.
The only way it can be determined is if domestic production for domestic consumption, domestic production for export, and import for domestic consumption can be separated. Then a multiplier can be created to define how secondary support products are increased due to an increase in a "primary" product. Then still, working out that efficiency issue just screws it.
Even then, defining what the heck a "primary" product is remains questionable. Is an Apple computer a primary product and Starbucks coffee is secondary because employees of Apple need their coffee? Or is the coffee a primary product and Starbucks customers need something to do while drinking coffee?
Who the h nows?
itfitzme
Silver Member
The concept is that if not for imports, employment would rise faster as employment, thus RGDP increased. RDGP per Capita is compared to Net Exports per Capita and Employment to Population Ratio. The concept is confligrated by efficiency and standard of living.
Below is the scatter plot of Net Exports per Capita vs RGDP per Capita. Net Imports (- net exports) increase with RGDP. They do not increase linearly. While increased domestic income increases demand which then would be expected to increase demand for imports, the relationship is not linear.
Only 57% of the variability in the trade deficit is the result of increased GDP. There are two possibilities. One is simply that it isn't a linear relationship. The marginal cost of labor is not linear. So this is quite possible. The second is that there is another factor. There is also the possibility that it is both.
The employment to population ratio has the same effect. As Net Exports decreases, employment goes up. This also has a non-linear effect such that employment accounts for only 59% of the increase in the trade deficit.
Two lines are presented. Line A is roughly where the trade surplus lies when employment is very low. It appears to be a surplus. Line A is drawn vertically to represent the effect if there were no importing. Line B is draws at the point where employment is at full. It represents what imports would do after employment hit full on the trajectory of A with the importing unleashed. These are hypothetical lines. The question is, what would this represent in real terms if possible. It would drag all the blue dots below line B over to A.
What is interesting is that the scatter is "pulled" in the direction of the regression line, but not by much. They are a bit scattered between the intersection of A and B. It really seems like it splits the difference.
If this concept of a net export employment detractor exists, it is in the curve of the plots above.
Can it be interpreted that the imports reduce employment from what it might have been had there been no imports? Yes.
Can we prove it? Not yet.
If it true, is the difference that interfering with the markets be worth the intervention given that it seems to come into play at about 43% and back out at 46%? Would it be beneficial in the greater balance of things or do we trust the markets?
I trust the markets.
Below is the scatter plot of Net Exports per Capita vs RGDP per Capita. Net Imports (- net exports) increase with RGDP. They do not increase linearly. While increased domestic income increases demand which then would be expected to increase demand for imports, the relationship is not linear.
Only 57% of the variability in the trade deficit is the result of increased GDP. There are two possibilities. One is simply that it isn't a linear relationship. The marginal cost of labor is not linear. So this is quite possible. The second is that there is another factor. There is also the possibility that it is both.
The employment to population ratio has the same effect. As Net Exports decreases, employment goes up. This also has a non-linear effect such that employment accounts for only 59% of the increase in the trade deficit.
Two lines are presented. Line A is roughly where the trade surplus lies when employment is very low. It appears to be a surplus. Line A is drawn vertically to represent the effect if there were no importing. Line B is draws at the point where employment is at full. It represents what imports would do after employment hit full on the trajectory of A with the importing unleashed. These are hypothetical lines. The question is, what would this represent in real terms if possible. It would drag all the blue dots below line B over to A.
What is interesting is that the scatter is "pulled" in the direction of the regression line, but not by much. They are a bit scattered between the intersection of A and B. It really seems like it splits the difference.
If this concept of a net export employment detractor exists, it is in the curve of the plots above.
Can it be interpreted that the imports reduce employment from what it might have been had there been no imports? Yes.
Can we prove it? Not yet.
If it true, is the difference that interfering with the markets be worth the intervention given that it seems to come into play at about 43% and back out at 46%? Would it be beneficial in the greater balance of things or do we trust the markets?
I trust the markets.
- Thread starter
- #112
Toddster Patriot, the contention is (more than otherwise) trade deficits are detrimental to their GDPs.
I did not write that imports are detrimental to their GDPs.
If the domestic processing and distribution of coffee would be identified and accepted as participating in an international enterprise, and if you rewrote the example to be profits due to a nationÂ’s entire trade deficit, (it hurts my ego to admit) youÂ’d make a good case.
The hindrance to your case is what I mentioned in message #105 when I wrote of the “perfect storm”, (i.e. the occurrence of a trade deficit that to some extent increased the GDP):
Within the last two or three centuries, I doubt if any industrial or modern nation has experienced such a “perfect storm”; but if it has or will occur, I don’t know how we would be able to recognize it.
Respectfully, Supposn
itfitzme
Silver Member
Actually, you never did.
Let's review, here is the series of your comments.
Actually, in reviewing your comments, you didn't show it. You did ask a good question.
Had you then demonstrated the answer to the question by detailing where each contributes to what values in the the GDP account of GDP = C + G + I + (X - M), you would have shown it.
What you do say is that "when he showed my coffee imports didn't reduce GDP." Indeed, you point out "There was no loss of GDP, as your calculation showed". He showed it.
So you have made both statements, that you showed it and that he showed it. One of you showed and the other didn't.
Perhaps your confusing what is in the other persons head with what is in your head and what is on the screen between you and the other person. Asking a question doesn't create what your thinking in the other person's head.
You get about 1/2 point of information for your first good question. You'd have gotten a full point for having actually shown it.
In six posts, you added .5 bits of information for an entropy of 1/6 = .166.
For what it's worth, Biamonte has a higher information entropy. It may not be right, but at least he commits to it. His rate of absorption sucks, but that's another issue.
I'm not even going to try to count DSGE's as it's far above one.
This is why your information entropy was at about .11, because you don't actually put any information on the screen with each post.
An entropy of unity would be a probability of one piece of information per post. Yours remains less then far below one.
Your avoiding committing to putting any information out there. Your unwilling to risk being wrong. And you wait until you think you've found some way to be right by the other person being wrong. Then you commit to something.
It's not very useful, dude.
Toddsterpatriot
Diamond Member
So you have made both statements, that you showed it and that he showed it. One of you showed and the other didn't.
My question (post #65) showed my increase in the trade deficit didn't reduce GDP.
His answer (post #67) was where he admitted the increase in the trade deficit didn't reduce GDP.
It's not very useful, dude.
Still hurt because I pointed out your errors, dude?
itfitzme
Silver Member
Oh good, I can ask you directly then. I poured over the thread and tried to find some way to identify the effect.
when you say, "detrimental to GDP", it is detrimental compared to what? That is really the question.
I expect the answer to be "detrimental to what the GDP would be without the trade deficit."
The follow up is to ask, how do we determine what it would be without it?
Your answer, I got as "by adding M back in again".
Am I following you correctly so far?
Toddsterpatriot
Diamond Member
Toddster Patriot, the contention is (more than otherwise) trade deficits are detrimental to their GDPs.
I did not write that imports are detrimental to their GDPs.
The import in my example added to the trade deficit.
The import in my example was not detrimental to GDP.
- Thread starter
- #117
[GDP/(trade deficit)] & [cause/effect]
ItFitzMe, the higher GDPÂ’s per capita indicate a more robust economy. USAÂ’s domestic marketsÂ’ sales volumes are positively related to our GDP.
The sales volumes of both domestic and imported products rise or decrease in general unison.
We sell both more domestic and imported products when our economyÂ’s doing well;
We sell both less domestic and imported products when our economyÂ’s doing poorly.
GDP affects the trade deficit; itÂ’s not the other way around.
Why are you looking at their relationship?
Respectfully, Supposn
ItFitzMe, the higher GDPÂ’s per capita indicate a more robust economy. USAÂ’s domestic marketsÂ’ sales volumes are positively related to our GDP.
The sales volumes of both domestic and imported products rise or decrease in general unison.
We sell both more domestic and imported products when our economyÂ’s doing well;
We sell both less domestic and imported products when our economyÂ’s doing poorly.
GDP affects the trade deficit; itÂ’s not the other way around.
Why are you looking at their relationship?
Respectfully, Supposn
itfitzme
Silver Member
Your statement, the thread topic is that "Trade deficits are always detrimental to the nation's GDP." That is a cause and effect relations statement where the cause, a trade deficit, causes a detrimental effect to the nation's GDP. The effect of a change in GDP is caused by the trade deficit. That's how I am reading the statement.
The best I can take the word "detrimental" is to mean "decreases", after all, no one considers an increase in GDP as being detrimental.
The comments regarding M decreasing GDP, which was questioned in terms of validity, appeared consistent with this interpretation.
How else did you mean it?
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itfitzme
Silver Member
So you have made both statements, that you showed it and that he showed it. One of you showed and the other didn't.
My question (post #65) showed my increase in the trade deficit didn't reduce GDP.
His answer (post #67) was where he admitted the increase in the trade deficit didn't reduce GDP.
It's not very useful, dude.
Still hurt because I pointed out your errors, dude?
Well, you don't know the difference between "in your head", "on the computer screen,", and "in the other person's head".
Let me see if I can show you what I am interested in. I am interested in cognitive errors. See, I am SHOWing you what I am interested in. I am typing the words, "cognitive errors." I suspect that you will be unable to SEE it because you can't tell the difference between what is in your head and what is on the computer screen.
I didn't say "I am hurt because you pointed out my error". If I felt hurt, I would have said, "I felt hurt". That is how you would know, because I SHOWED IT to you. What I said was that you didn't SHOW him anything.
I write "cognitive error" and you see "Oh, he feels hurt". Can you see that those two phrases are different? Stop and look at them. Read the two again. See. I'm SHOWING YOU.
(I'm litterally typing really slow for you, like it's going to help.)
I did say "you asked a good question". I then said, to SHOW IT, you would have to actually SHOW IT.
I was noticing, in this thread, that you again can't tell the difference between what is in your head and the other person's head. In this case, a rare case, you asked a good question. But you then made this odd comment of "showing" the OP something.
I copied all your posts to SHOW YOU. Look up there ↑, literally, at the top of this comment. I copied your post number 65 to SHOW YOU exactly what I am refering to.
In it, you set up a problem and asked a question. But you didn't SHOW anything.
He showed it to himself because when he read the question you typed he then asked himself the question in his head and was able to use it to show himself something that he then typed on his computer and showed you. You were not in the room with him. He was all by himself at his house on his computer reading your question. Your question didn't SHOW an answer. He made the answer in his head. Your question didn't cause the pictures of the answer in his head, it caused the pictures of the question. He caused the pictures of the answer. If he had never ever thought or read anything about economics, he wouldn't have caused the answer in his head. Your question isn't a direct cause. It's the accumulation of his experiences that are the major cause.
You said, in your post, "Let's calculate them again." That is figurative. You didn't literally calculate it with him. Your not at his house. You have no idea what he did. It's a reasonable abduction, but you didn't do it with him.
I thought I'd take this opportunity to SHOW you the difference between "on the computer screen" and "in your head". You put a question on the computer screen. If there is something in your head that it represents to you, that's in your head, not in the other guys head. Whatever is in the other guy's head is the question he reads on the computer screen and whatever he shows himself in his head. You could say, "Duck's make what sound?" and if he never has heard a duck he might think, "tweet tweet tweet". You didn't show him "quack quack quack". Is this making any sense to you yet?
I thought I'd take this moment to SHOW YOU SOMETHING. But, I instead showed myself something, that you really don't get this idea of "in your head", "on the computer screen", and "in the other person's head".
That's all I needed to know. Now I get it. You have successfully shown me that you can't. And that I can't SHOW you. You can't tell the difference between "in your head" and "on the computer screen".
I couldn't make it simpler for you. It is so obvious, simple. It's like "Duh" to most people. The most reasonable response would be "duh!". (I set you up for one other response that would really SHOW you get it. Can you think of what it is?)
Economics is a psychological science. The reason it is a social science and not a physical science is because it is the psychology and behavior of human beings as they relate in the redistribution of scares resources. It's a specific anthropological science.
If you cannot get this simple chain of psychological causal and effect of information as it moves from your head to the computer screen to the head of another person, and know the difference, you cannot truly understand economics.
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itfitzme
Silver Member
I got it as soon as you said it. Thanks. It's all at the tip of my tongue but I spent the last few years doing coke and banging hookers with my bail out bonuses.
I've got to bone up on it (the econ, not the hookers) since they started cracking down. I'm actually expected to know this shit now.
I really appreciate it.
You have no idea how much a hooker cost on Wall Street. The coke and extras are included, so you can imagine.
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