ItFitzMe, youre playing with the formula which I often also do. I generally hit a wall and do not accomplish anything but I, (like a child) do learn by playing.
I also realized that both Consumers, (C) and Investments, (I) expenditures have some portions that are attributable to exports.
The problem is that they had no sources of creditable data to determine the proportional break down of domestic and exports within (C) expenditures; (statistically the break down for (I) is unimportant).
Regarding terms M and X, I suspect that domestic expenditures are based upon retail prices but how would they generate retail prices for imports? They have to be using global trade prices; (i.e. wholesale prices) or theyre multiplying import prices by an arbitrary number. (export retail prices are unimportant).
Weve thus far identified two reasons for the understatement of import and export prices, externalities and unavailability of total import and total export retail amounts.
"The problem is that they had no sources of creditable data". That's the problem with economics, it often depends on the availability of data. Without data, all we have is a hypothesis. And until you prove or disprove the hypothesis, you can't make the next step to figure out what data to look at next. It's like the interplay between theoretical physics and experimental physics. They advance together, standing on each others shoulders. Economics has an extra problem in that you can't do experiments. So it has to wait until the economy does the experiment naturally. And hopefully, the economists have been able to convince the politicians to spend the money on the data collection.
That has always been the problem with economics, figuring out how to find things in the available data.
Trust me on this, it's not the problem. The problem is what caused the recession, not what might have been. The problem is always, "what happened?" not "what didn't happen?".
The problem with the "shipping jobs overseas" thing is that it doesn't look at the economies from a global perspective of continuous growth. It's a static model that only becomes a question when recessions hit and growth stop temporarily.
The fact is that the trade imbalance only exists while the advanced country is growing, increasing in labor utilization. It can only detract from the national production if there was a higher to detract from. There is no "greater production" reference point. The national production was always less before the trade imbalance. As such, supporting services, what I called "positive externatilities" are being absorbed by the countries current industries.
The trade imbalance increases the standard of living for both countries. If the imports are investment, it also increases the national production for both countries.
We are getting into the position that we have to consider exactly how comparative advantage really works for two countries. Then we can consider if there really are any detrimental effects due to some lost "positive externatilities" that is the loss of stimulation of supporting industry and services due to the loss of manufacturing of the imported products.
Consider two islands, one that has flint and one that has steal. The two pieces, combine, make a pair that can be scratched together to make fire. Alone they are useless. So the two countries begin trading. In this case, the have net zero trade balance. Each has a physical comparative advantage.
Now, instead, consider two countries that have different technologies, one knows how to make DVDs and the other can make DVD players. Each is tooled up and each has a comparative advantage based on the tooling. There is no point in one tooling up to make the other. The trade balance is still zero.
Now, instead, consider two countries with different standards of living. One is ahead technologically. It has new technology, DVD players and DVDS along with an old technology, tennis shoes. The poor country will happily tool up and make tennis shoes cheaply while the wealthy country tools up and makes DVD players. In fact, as the DVD players are beginning to be tooled up and made, the sneaker manufactures just move their production to the poor country. So now the wealthy country is happily making DVD players and importing sneakers. This is, of course, a weak example. The full global economy has more countries, more products, and trade going both ways. The balance is finer, infinitely incremental. Also, population is increasing in both, there are more then two products, even the workforce is increasing in both.
Anyways, so the poorer country is enjoying an increasing standard of living. They are learning to make sneakers. They are building services around their sneaker manufacturing.
The wealthy country is further ahead. They already know how to make sneakers and there is no need for sneaker support, even sneaker research. On the other hand, they have supporting industries around the DVD technology. There standard of living is increasing, their workforce is increasing, their efficiency is increasing. So there is no detractor due to the lack of making sneakers. Their resources and developing supporting resources are all organized about new technologies. They are fully utilized. If they are not fully utilized, like a medium wealth country, they are more utilized then they were before. In the long run, utilization increases to maximum. The long run was what, like 40 years+.
As long as utilization is below maximum, gauged by it increasing, there is no detractor.
There is no detractor to employment due to a trade imbalance. If there is not detractor to employment, there is no detractor to production.
And when the world economy goes into recession, trade imbalances begin to shrink. The recessions are not caused by the trade imbalances. The shrinking trade imbalance offsets the recession. The trade imbalance is a minor issue compared to benefit of the gains from comparative advantage as both countries increase in standard of living. It doesn't cause it and it won't stop it.
The recessions are caused by something else and eliminating the trade imbalance would have eliminate the gains of comparative advantage. The imbalance occurs because the importing country is able to better utilize the resources in increasing the global standard of living. They need sneakers so they can make DVD players. And because they see growth on the horizon, they will happily import just about anything.
Is it too much? Too much compared to what? It's always more then it was before and there is not previous history to determining a maximum. There is no too much except in retrospect is seems like it might have been too much.
The global economy is goal seeking. As it goal seeks, it finds a new solution and then the standard of living increases. At some point, the particular solution becomes "tapped out".
Then imports fall back. Why do they fall back?
Even then, the global economy restructures around a new equilibrium. Perhaps a zero trade imbalance, like those two countries where each is tooled up for different things. We don't know exactly what happens, it hasn't happened yet.
Trade imbalances do not detract from national production. Trade imbalances are the national productions finding a balance of preferred growth rates in a global economic balance by best utilizing scarce resources.
The contraction in production is separate and causes a contraction in the imbalance.
The trade increases growth rate for both countries. The trade imbalance increases the standard of living for both countries. Balanced trade won't increase the growth rate for the importing country. There is no way to prove "what might have been" unless there is data to show that it was before. There is no data to show that it was before.
The trade imbalance only looks like a problem after the recession is over and with high unemployment because, with perfect 20/40 hindsight, all we see is the jobs that we use to have but we don't see that we traded those jobs for better ones and a higher standard of living.
"to make it consistent with individual preferences".
