Trade deficits are detrimental to their nation's GDP

Trade deficits are detrimental to their nation's GDP

Postby Supposn » Mon Mar 13, 2017 9:06 am

Excerpted from Wikipedia’s “Balance of Trade” article:
“Trade balances effects upon their nation's GDPs.
Exports directly contribute and imports directly reduce their nation's balance of trade (i.e. net exports). A trade surplus is positive net balance of trade, and a trade deficit is a negative net balance of trade. Due to balance of trade being explicitly added to the calculation of their nation's gross domestic product using the expenditure method of calculating gross domestic production (i.e. GDP), trade surpluses are contributions and trade deficits are "drags" upon their nation's GDP”. …
… Refer to:
“http://www.investopedia.com/terms/e/expenditure-method.asp
http://www.bea.gov/methodologies/index. ... ional_meth
http://www.britannica.com/topic/gross-domestic-product”.

///////////////////////////////////////////////////////////////////////////////////////////////////////////
Is there any net economic benefit to a nation’s chronic annual trade deficits of goods?

If a nation experienced an annual negative balance of global trade, (i.e. a trade deficit), that nation’s GDP was less than otherwise. A lesser GDP reflects upon, and is reflected upon by the nation’s lesser numbers of jobs during that same year. I’m unaware of any nation that enjoyed full employment while experiencing an annual trade deficit.

Proving trade deficits are beneficial or not detrimental to nations’ GDPs by statistical “proofs” are based upon specious reasoning.
[Within a nation’s markets, both their domestic and imported goods are sold. (We have no general rules applicable to aggregate types of goods and the proportional volumes between domestic and imports sold within each nation’s domestic markets during each of their markets differing conditions].
Generally, we expect that during a nation’s periods of improved GDP, the sales volumes of their domestic markets similarly improve; when their GDPs are stagnant or declining. we expect those sales volumes to similarly be stagnant or decline.

Demonstrating trade deficits are reduced during times of lesser national GDPs only indicates that less imports are sold within the nation’s domestic markets during those periods.

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Re: Trade deficits are detrimental to their nation's GDP

Postby spacemonkey » Mon Mar 13, 2017 12:03 pm

I wonder what they will do when 90% of the workforce is automated? They will sell their products to ____________ who?
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Re: Trade deficits are detrimental to their nation's GDP

Postby John Galt » Tue Mar 14, 2017 10:30 pm

I said this last time you posted it but you can't just quote what you wrote on Wikipedia and pretend it's a source. I see you put links to things like Britannica but that doesn't explain your point.

Here is an article on investopedia that directly contradicts your conclusions

http://www.investopedia.com/ask/answers ... ations.asp


Very few economic subjects have caused as much confusion and debate as the balance of trade. This confusion is driven by the language involved in reporting a country's net trade in final goods; "trade deficit" sounds bad, while "trade surplus" sounds good.

As long as exchange rates are free-floating, however, trade imbalances never really exist in the long run. Even if they did, there is little reason to believe they would have negative consequences.

Suppose the United States ran a $100 million trade deficit with Germany, largely because Americans liked German cars more than Germans liked American cars. The payments, in dollars, made by Americans to German automakers would eventually come home in the form of dollar assets.

Even though GDP would fall by $100 million, the American economy is no worse off (and has actually benefited from) the net exchange. The Germans sold cars to Americans in exchange for the Americans selling dollars for Germans, so that the Germans could hold assets such as Treasury bills (T-bills) or real estate.


The key point is that we buy stuff in dollars.

And again, here's another article

http://www.investopedia.com/articles/ec ... ffects.asp

Trade Deficit Effects
There are two competing theories that have surfaced regarding the effects of a trade deficit on GDP:

Theory 1: Trade deficits drag down GDP and add to the threat of an economic crisis if foreigners dump the local currency in world currency markets.
Theory 2: Increasing trade deficits can be a sign of strong GDP. They will not create a drag on GDP, and any potential downward pressure on the local currency is actually a benefit to that country.


Theory 1 is your theory. And the article takes it apart

Theory 1 suggests there will be a general underlying weakness in the economy of the local country during periods of substantial trade deficit. Intuitively, the theory makes sense. If you are buying more than you are selling, it seems logical that this would be bad for the economy - especially in countries where the products to be exported do not create enough jobs to offset the jobs lost by importing goods.

Theory 1 may seem to make logical sense, but unfortunately the numbers do not support it. Throughout the 1990s and beyond, import heavy countries have run consecutive deficits frequently. For example, the United States has a massive and growing trade deficit, and so if Theory 1 held true, we should see the its GDP growth hindered. The opposite is the case however (Figure 1).

According to the U.S. Census Bureau, from the early 1990s to 2007, the U.S. continues on a general trend of increasing GDP year over year; the trade deficit is also increasing. If Theory 1 was true, there would be an inverse relationship between GDP and a trade deficit, but this does not seem to be the case. There are short periods of time in U.S. history where we see reduced GDP in conjunction with an increasing trade deficit, but most of those time periods can be excused as anomalies and the short-term weakness can be attributed as a symptom of other ailments and the trade deficit is just the nature of the host. As for the situation of dumping dollars in the world currency markets, this can happen in any environment but the probability of coordinating such an effort is low.

Theory 2 may hold much more weight as evidenced by the positive correlation between the U.S. GDP and the trade deficit. This can be easily explained by the fact that the U.S. is a demand-based consumer society with a negative savings rate. In addition, as the U.S. evolves into more of a service society, the products that individuals demand will no longer be made in the country. As more manufacturing and labor intensive products are created outside of the U.S., a trade imbalance may be inevitable.

In fact, the economic growth from 1980-2000 tended to grow in years in where the trade deficit grew compared to those years in which it declined. This provides even more evidence that an imbalance of trade in the form of a deficit did not drag the economy





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Re: Trade deficits are detrimental to their nation's GDP

Postby Supposn » Tue Mar 28, 2017 5:10 pm

John Galt wrote: ...http://www.investopedia.com/ask/answers ... ations.asp
... As long as exchange rates are free-floating, however, trade imbalances never really exist in the long run. Even if they did, there is little reason to believe they would have negative consequences.

Suppose the United States ran a $100 million trade deficit with Germany, largely because Americans liked German cars more than Germans liked American cars. The payments, in dollars, made by Americans to German automakers would eventually come home in the form of dollar assets.

Even though GDP would fall by $100 million, the American economy is no worse off (and has actually benefited from) the net exchange. The Germans sold cars to Americans in exchange for the Americans selling dollars for Germans, so that the Germans could hold assets such as Treasury bills (T-bills) or real estate.
...

... http://www.investopedia.com/articles/ec ... ffects.asp
Trade Deficit Effects
There are two competing theories that have surfaced regarding the effects of a trade deficit on GDP:
Theory 1: Trade deficits drag down GDP and add to the threat of an economic crisis if foreigners dump the local currency in world currency markets.
Theory 2: Increasing trade deficits can be a sign of strong GDP. They will not create a drag on GDP, and any potential downward pressure on the local currency is actually a benefit to that country.


Theory 1 is your theory. And the article takes it apart
Theory 1 suggests there will be a general underlying weakness in the economy of the local country during periods of substantial trade deficit. ...

... Theory 2 may hold much more weight as evidenced by the positive correlation between the U.S. GDP and the trade deficit. This can be easily explained by the fact that the U.S. is a demand-based consumer society with a negative savings rate. In addition, as the U.S. evolves into more of a service society, the products that individuals demand will no longer be made in the country. As more manufacturing and labor intensive products are created outside of the U.S., a trade imbalance may be inevitable.
In fact, the economic growth from 1980-2000 tended to grow in years in where the trade deficit grew compared to those years in which it declined. This provides even more evidence that an imbalance of trade in the form of a deficit did not drag the economy


I hope you'll correct Wikipedia now


John Galt, if a wealthy man lights his cigars with $1,000 bills, it reduces his wealth but if he were sufficiently wealthy, you may, (or you may not) be overstating the case to describe his “conspicuous consumption” as “general underlying weakness to his financial condition”. That does not mean that lighting cigars with USA currency (at the current U.S. dollar’s value) is to be generally recommended for advancing anyone’s financial condition.

It has not been stated that trade deficits will always cause annual GDP’s to fall; it’s stated that nation’s annual GDPs are less than otherwise if they experienced a trade deficit that year. Had they been able not to experience a trade deficit, their GDP would have been greater. This is true regardless of what economic condition the nation experienced that year. The extent of drag upon the nation’s GDP and lesser numbers of jobs due to their trade deficit just some of the factors that have significant affects upon their nation’s economy.
Similarly to this logical concept is how trade surpluses promote their nation’s annual GDPs and numbers of jobs.

When U.S. dollars return to the USA for foreign purchase of USA products they create more positive balance of USA’s global trade; (i.e. it reduces our chronic trade deficits). When they return as loans to USA entities or to purchase shares of USA enterprises, they return as foreign claims upon our nation’s future production.
There’s no free lunch. USA’s entities must pay for debt services or share more of their earnings with foreign entities. The manner of how U.S. dollars return to the USA makes a difference. USA’s annual GDPs per capita, the proportion of our population that are working and their median wage’s purchasing powers have been losing comparative momentum. Your theory 2 doesn’t describe a sustainable economy.

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Re: Trade deficits are detrimental to their nation's GDP

Postby Supposn » Tue Mar 28, 2017 5:35 pm

John Galt wrote: ...http://www.investopedia.com/ask/answers ... ations.asp
... As long as exchange rates are free-floating, however, trade imbalances never really exist in the long run. Even if they did, there is little reason to believe they would have negative consequences.

Suppose the United States ran a $100 million trade deficit with Germany, largely because Americans liked German cars more than Germans liked American cars. The payments, in dollars, made by Americans to German automakers would eventually come home in the form of dollar assets.

Even though GDP would fall by $100 million, the American economy is no worse off (and has actually benefited from) the net exchange. The Germans sold cars to Americans in exchange for the Americans selling dollars for Germans, so that the Germans could hold assets such as Treasury bills (T-bills) or real estate.
...

... http://www.investopedia.com/articles/ec ... ffects.asp
Trade Deficit Effects
There are two competing theories that have surfaced regarding the effects of a trade deficit on GDP:
Theory 1: Trade deficits drag down GDP and add to the threat of an economic crisis if foreigners dump the local currency in world currency markets.
Theory 2: Increasing trade deficits can be a sign of strong GDP. They will not create a drag on GDP, and any potential downward pressure on the local currency is actually a benefit to that country.


Theory 1 is your theory. And the article takes it apart
Theory 1 suggests there will be a general underlying weakness in the economy of the local country during periods of substantial trade deficit. ...

... Theory 2 may hold much more weight as evidenced by the positive correlation between the U.S. GDP and the trade deficit. This can be easily explained by the fact that the U.S. is a demand-based consumer society with a negative savings rate. In addition, as the U.S. evolves into more of a service society, the products that individuals demand will no longer be made in the country. As more manufacturing and labor intensive products are created outside of the U.S., a trade imbalance may be inevitable.
In fact, the economic growth from 1980-2000 tended to grow in years in where the trade deficit grew compared to those years in which it declined. This provides even more evidence that an imbalance of trade in the form of a deficit did not drag the economy


I hope you'll correct Wikipedia now


John Galt, if a wealthy man lights his cigars with $1,000 bills, it reduces his wealth but if he were sufficiently wealthy, you may, (or you may not) be overstating the case to describe his “conspicuous consumption” as “general underlying weakness to his financial condition”. That does not mean that lighting cigars with USA currency (at the current U.S. dollar’s value) is to be generally recommended for advancing anyone’s financial condition.

It has not been stated that trade deficits will always cause annual GDP’s to fall; it’s stated that nation’s annual GDPs are less than otherwise if they experienced a trade deficit that year. Had they been able not to experience a trade deficit, their GDP would have been greater. This is true regardless of what economic condition the nation experienced that year. The extent of drag upon the nation’s GDP and lesser numbers of jobs due to their trade deficit just some of the factors that have significant affects upon their nation’s economy.
Similarly to this logical concept is how trade surpluses promote their nation’s annual GDPs and numbers of jobs.

When U.S. dollars return to the USA for foreign purchase of USA products they create more positive balance of USA’s global trade; (i.e. it reduces our chronic trade deficits). When they return as loans to USA entities or to purchase shares of USA enterprises, they return as foreign claims upon our nation’s future production.
There’s no free lunch. USA’s entities must pay for debt services or share more of their earnings with foreign entities. The manner of how U.S. dollars return to the USA makes a difference. USA’s annual GDPs per capita, the proportion of our population that are working and their median wage’s purchasing powers have been losing comparative momentum. Your theory 2 doesn’t describe a sustainable economy.

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Re: Trade deficits are detrimental to their nation's GDP

Postby Supposn » Tue Mar 28, 2017 8:34 pm

John Galt, referring to my explanation within this thread’s first, 10:06 AM, 13Mar2017 post:
“Proving trade deficits are beneficial or not detrimental to nations’ GDPs by statistical “proofs” are based upon specious reasoning. ...
... Demonstrating trade deficits are reduced during times of lesser national GDPs only indicates that less imports are sold within the nation’s domestic markets during those periods”.

and your 11:30 PM, 14Mar2017 response to it:
You refer to “theory 1” as my theory, and you support what you describe as “theory 2”.

I respect and try to understand markets’ behaviours. I believe it’s easier to devise policies compatible to what motivates people rather than to try to motivate people to conform with the policies we devise.

Due to lesser costs, and/or faster, and/or more feasible communication and shipping, service products not requiring geographic proximity to their delivery points have already begun being delivered globally and in larger volumes; they’ll soon be much more commonly traded globally.
I do not share your certainty “as the U.S. evolves into more of a service products society”, the products that individuals demand for services will continue to done here in the USA. I do believe that our current global trade practices are and will continue (as you predict) USA’s chronic trade deficits will increase; but we will be importing both goods and service products.

lesser priced labor will continue to be of competitive global advantage. product quality is just another facet of lesser priced labor. nations of lower wage purchasing powers can provide less expensive common labor and less expensive higher quality labor. They can better afford to devote more hours of labor per unit if that’s what’s necessary to assure quality.

Significantly reducing our chronic trade deficits would be of great economic benefit but any improvement of our educational and training systems would be no less reflected upon our social and economic well-being.

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