Monday, December 26, 2016

Trade Deficit

Faith in numbers:
GDP = C + I + G + (X - M) or GDP = Consumption + Investment + Government purchases + Exports - Imports

"When net exports are negative," Ross and Navarro write, "that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth." Navarro is Trump's new head of the National Trade Council. He is the Head Of Trade Management!
He, Navarro, and presumably the guy who appointed him, believe that, therefore, we can boost growth by curtailing imports. He has faith in numbers. That's what the equation looks like. The same logic would conclude investment money coming into the country was a negative for GDP.

He goes on: "Trump proposes eliminating America's $500 billion trade deficit through a combination of increased exports and reduced imports. Again assuming labor is 44 percent of GDP, eliminating the deficit would result in $220 billion of additional wages."

Matt Yglesias responds: "According to Ross and Navarro, if the United States made it illegal to import oil, thus wiping $180 billion off the trade deficit, our GDP would rise by $180 billion. With labor constituting 44 percent of GDP, that would mean about $80 billion worth of higher wages for American workers. So why doesn't Congress take this simple, easy step to boost growth and create jobs?
Well, because it's ridiculous."

Yglesias also has faith in numbers.
GDP = Consumption + Investment + Government purchases + Exports - Imports. Looking at this superficially some, but usually not professionals, assume that trade deficits subtract from GDP, because there is a minus sign attached to imports. What they forget is that the goods imported then show up as a positive in either the consumption or investment category. So a gallon of gas imported at 1 dollar is a minus dollar for GDP--but, when it is later sold for 2 dollars, it is a positive 2 dollar for GDP, a net positive 1 dollar.

Faith in numbers.

We all must hope and pray the Chief Executive is less influential than we think.

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