23 Balance of trade

  1. Most misunderstood statistic and the 4th goal of macro
    1. If imports are higher then there is a trade deficit
    2. If exports are higher then there’s a surplus
  2. Accounting for trade
    1. Merchandise trade balance
      1. Old system of counting trade
      2. Accounted for goods only as countries weren’t trading services or investing too much
    2. Current account balance
      1. Goods, services, investment income(countries investing in another country)
      2. Bureau of economic analysis evaluates
    3. Unilateral Transfer is when a guest worker makes money in a foreign country and sends it home.
  3. U.S. Trade history
    1. Through the decades
      1. 1940’s-70’s about even, maybe a slight surplus
      2. 70’s-80’s same, maybe a slight deficit
      3. 80’s saw a boom in deficits
      4. Late 90’s early 2000’s saw a boom as well
      5. As of 2003 the Deficit sat at $531B
    2. Deficit is now(2004) about 4-5% of GDP
  4. Trade balance( sometimes symbolized as NX or net exports)
    1. Flows of capital
      1. Surplus flows in, deficits flow out
      2. When goods/services flow out, it becomes an investment in the debtors economy(that is, the surplus gets exchanged for the home countries currency and the other nations currency becomes an investment, hoping for the currency to become worth more)
      3. Borrowing brings in an influx of investments
      4. National savings investment identity(identity meaning it is true by definition)
        1. Domestic saving + foreign capital= Domestic investment + Gov’t borrowing
        2. Since its true by nature (savings identity) then if the government borrows more, then;
          1. Domestic savings went up
          2. Increased foreign capital, and/or;
          3. Domestic investment went down
        3. Investment in this case includes inventories, therefore, less domestic spending equals more inventory equals an increase in investments
      5. If Gov’t borrows more then there is less domestic money supplied, people save more
        1. Deficits equals more money supplied
        2. More inflow of foreign capital because of the money going to other countries
  5. U.S. trade deficits
    1. We have become the net debtor of the world
    2. Trade deficits helped build the RxR’s
      1. Deficits can be good if economy is going well
      2. Does the borrowing help the bottom line
        1. Borrowing money to make more money is ideal;
        2. Borrowing money to buy things that will never repay itself is to be avoided(buy it cash)
    3. No precedent for every other country investing in one other country
      1. Is it sustainable?
      2. How much longer will they continue
      3. What happens when the bill comes due
    4. However it is always best if a country invests from within, that way the fruits of the investment flows internally
  6. Trade deficits in macroeconomic terms
    1. Bi-lateral trade deficit means nothing in a macro-economic viewpoint
    2. Trade deficits are caused by patterns of national savings and investment
      1. U.S. in 1980’s and 2000’s ran up huge budget deficits and were accompanied by trade deficits
      2. The other two parts of the national savings and investment identity play a role
      3. Higher trade deficits are not controlled by how much one trades or by greater exposure, Japan(High surpluses) and U.S. (high deficits) have relatively low trade levels
      4. Higher income countries tend to have higher trade surpluses (except U.S.)
      5. Example: I have a huge trade deficit with Safeway is my life better or worse? Safeway doesn’t come in to Shirley’s to tip me out.
  7. Mercantilism
    1. Restrain imports encourage exports
      1. Aimed at obtaining the gold of other countries
      2. Thus creating dominance by then having all the money
    2. Believes only one party benefits in trade(the seller)
    3. Believes there is a fixed volume of trade
    4. There are those who still believe in such
    5. When you buy and live locally you forgo specialization
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