gdp and trade deficits

A recent letter to the editor which stated that the American trade deficit lowers America’s GDP. Specifically: “When an American firm moves production offshore, the United States’ Gross Domestic Product declines by the amount of offshore production, and the foreign GDP increases by that amount.”

This statement is correct but not in the way the author expects. The reported levels of GDP might not change, because what a country imports in goods it exports in capital (money). While America has a “trade deficit” it runs an equal “capital account surplus”. Due to this “capital account surplus” the US government can borrow money readily and engage in “deficit spending”. In other words, American consumers can consume more than they produce and also the government can spend more than it raises in taxes, simultaneously. This occurs because the dollar is internationally considered a safe investment. But because government spending is included in GDP figures, the “trade deficit” might not impact GDP.

GDP fetishism is where people overemphasis the value of the measures of GDP. GDP is useful, but the fact is that GDP calculations are calculated in bizarre ways. Like a sausage factory, people don’t want to know what goes into the equation. One error is that GDP equates $1 of government spending to $1 of private spending. Pretend there are two countries equal in population and production. One government spends 90% of all income. The other government spends 10% of all income. Which country is richer? Naturally, people should understand that an individual spending their own money on their own priorities is better than an impersonal bureaucrat spending other people’s money on political objectives. The country with 90% government spending will be shown to be severely impoverished comparatively. This would be even though the two countries have the same GDP.

So, do trade deficits hurt the economy? To the extent that the trade deficits increase government spending, it is to that extent that trade deficits are harmful. Do trade deficits reduce GDP? If GPD is controlled to account for government spending.

About christopher fisher

The blog is meant for educational/entertainment purposes. All material can be used and reproduced in any length for any purpose as long as I am cited as the source.
This entry was posted in Economics, Goverment, Standard of Living, Trade. Bookmark the permalink.

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