outflows - 4.e Dollar outflows Trade Deficits and Bank Runs...

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Many Americans see a US trade deficit as a bad thing. The following statement reflects a typical attitude: I know we were screaming in 1992 when the trade deficit was $50 billion a year. We are now at over $650 billion a year, headed north of $700 billion. This is a transfer of $700 billion of American wealth out of the country on an annual basis. We are not paying for our imports with our exports. We are paying for it with American wealth. And that is a dangerous trend. (Terrence Straub, Senior VP of US Steel, 2005) One would never guess it from listening to statements like the one above, but a trade deficit is not a bad thing. Trade between countries is voluntary, and people will not trade unless they gain from that trade. The fallacy of ‘dangerous’ trade deficits is widespread, but easily refuted. When the VP of US Steel says that the US trade deficit amounts to a transfer of $700 billion of American wealth out of the country, he neglects to mention that the US receives $700 billion of foreign goods in exchange. When he says that we pay for imports, not with exports but with our wealth , he says only that foreigners have used $700 billion of their export earnings to buy $700 billion worth of US stocks, bonds, real estate, and cash (all of it from Americans who were willing, even eager, to sell). Figure 4.e.1 shows trade between New Zealand and Japan. Japan is exporting $100 worth of cars to New Zealand, while New Zealand exports $80 worth of wool to Japan. As shown, New Zealand is running a $20 trade deficit, while Japan has a $20 trade surplus. Many people would think that Japan, with its trade surplus, is getting the better end of the deal, while New Zealand is on the losing end. This is not the case. Trade between two countries must always balance. Japanese exporters would never send $100 worth of goods to New Zealand unless they received $100 worth of items in return. Since the $80 worth of wool does not quite cover the $100 worth of cars, there must be another $20 worth of something flowing from New Zealand to Japan. That something might be $20 worth of bonds, stocks, real estate deeds, cash, etc. For our purposes, it is easiest to suppose that it is 20 US dollars. The Fundamental Theorem of Exchange says that all voluntary trade must benefit both traders, else the trade would not have happened. In this case, Japanese people must have wanted the wool and the $20 cash more than they wanted the $100 worth of cars. New Zealanders must have wanted the cars more than they wanted the wool and the cash. Neither country is injured by this trade.
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This note was uploaded on 05/05/2010 for the course ECON 303 taught by Professor Cheng during the Spring '07 term at USC.

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outflows - 4.e Dollar outflows Trade Deficits and Bank Runs...

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