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To: lasereye
You don't know what you're talking about. Exports keep going up.

Actually I do know what I'm talking about. The trade balance keeps getting worse, despite the increase in exports. That we are transfering wealth by investing more of our capital each year in foreign production for domestic consumption cannot be disputed. That same capital invested in domestic production for domestic consumption, instead of trade, would cause twice the wealth at home. By encouraging international division of labor (which is different than trade), we are decreasing the per capita capital investment in domestic labor, i.e., decreasing our standards of living, and we are increasing the per capita capital investment in foreign labor. Increased exports are more than offset by increased imports, and the effect is a net loss of capital.

The formula for GNP is C + I + G + X - M. Since M has been consistently worse than X for the last 40 years, the government decided to use the term GDP, which conveniently sets aside M, to avoid having to show red ink.

Now if X + M were spent on C instead, our DNP and GDP would increase by exactly that much. If X and M were equal, then entire capital expended in trade would amount to a wash - the "zero sum" that free traders claim doesn't exist.

Now the reality is we have to trade. But we do not have to "free trade" - which is to say, we do not have to engage in division of labor with other countries. The cost for the privledge to trade with us should be an ad valorum tariff. The cost for free trade - i.e., division of labor -- should be statehood, in which case the division of labor might really be beneficial to all involved. But few people think of trade in this way, because of the low degree of mental rigor applied to the issue in our colleges and our talking head shows.

75 posted on 02/21/2003 8:56:06 AM PST by Publius Maximus
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To: Publius Maximus
The trade balance does keep getting worse, but your statement that exports have failed to materialize is clearly wrong. They have gone up substantially. The single biggest factor in the large imports is that the dollar has been strong, which is a good thing, and which makes imported goods cheaper, which is a good thing.

Also, your statement that we are investing more capital each year in foreign production is as erroneous as your statement that exports failed to materialize. Trade deficits result in net foreign investment in the United States. The net foreign investment is equal to the amount of the deficit.

Net foreign investment equals the amount that foreigners invest in the U.S. (their purchase of assets here) minus the amount that U.S. residents invest abroad (U.S. residents' purchase of assets in other countries). Net foreign investment generally equals net exports.

"For example, if you and your neighbors want to buy jackets made in Mexico, a local wholesaler trades dollars for Mexican currency, the peso, and buys the jackets. The person or bank that traded the pesos for dollars must have a plan for those dollars. One possibility is that the person plans to buy something in the U.S.; U.S. exports would rise. Another possibility is that the person plans to invest in the United States (lend money to someone here or actually invest in the U.S. economy, perhaps purchasing stock or buying a company).

If the first option is chosen, exports will rise with imports and there will not be a merchandise trade deficit. However, if the second option holds, there will be a merchandise trade deficit (exports will be less than imports). And, if the "extra" dollars are used by foreigners to invest in the U.S., then net foreign investment (the difference between U.S. investments abroad and the investments of foreign residents in the U.S.)will be negative, equal to the merchandise trade deficit (the value of exports minus imports ­ referred to as "net exports").

Net exports equal net foreign investment. In other words:

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Exports -­ Imports = U.S. Investments Abroad ­- Foreign Investments in the U.S.

If dollars leave the U.S. to buy foreign goods and they are not used, in turn, to buy goodsin the U.S., then they must be used for some other purpose, and that is often directinvestment in the U.S. economy.Here is one way to think about it. The total value of all final products produced in a yearin the United States is called the Gross Domestic Product or GDP. The total value of final goods produced in the United States equals the total value of what is purchased.

These purchases can be broken down into several components:
Consumption Expenditures (C)
Investment Expenditures (I)
Government Spending (G)
Net Exports (Exports ­- Imports) (NX)

Exports are part of domestic production. Imported goods are produced abroad. Becauseimports are included in measures of consumption, investment and government expenditures -- yet they are produced abroad ­imports must be subtracted out.

This can be written:

Y = C + I + G + NX
Or alternatively:

Y ­ C ­ G = I + NX

If the economy is closed to international investment, there will be no imports or exports. In this case, domestic saving (S) will tend to equal domestic investment (I) in equilibrium. The interest rate will adjust until the quantity supplied of loanable funds (by those who save) is equal to the quantity demanded of loanable funds (by those who want to invest).

But, in an open economy, investments move across countries. If foreign individuals, from whom we purchase goods, decide to use the dollars they earn to invest in the U.S.economy, then NX will be negative and an equal amount of funds will be invested in the U.S. by foreign individuals and firms. Foreigners who hold our dollars will directly invest in the United States. Mathematically, S -­ NX = I (remember, NX is negative when imports are greater than exports, so "minus NX" is a positive number).

Alternatively, we can write:

S ­ I = NX

If I > S, this means that NX < 0; in other words funds are flowing into the U.S. from abroad. (We must be borrowing from the rest of the world.)

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If I < S, this means that NX > 0; in other words, U.S. savings are flowing out of the U.S. for investment abroad.

One more time: If imports are greater than exports, NX will be negative. Dollars will be in the hands of individuals in foreign countries who do not want to buy goods and services from us but, instead, plan to invest in our economy.

A merchandise trade deficit (imports greater than exports) means that net foreigninvestment is negative as well (more funds are invested in the U.S. than we invest abroad). The dollars that are traded to pay for our imports come back in the form of investments in the U.S. by foreign individuals or companies. We buy goods and services from them, they "buy" investments here.

Is this good or bad? Economists would say "resources are going to their highest valueduse." However, if you are an exporter in the U.S., you won't like it! Overall, foreign investment has a positive effect on economic activity in the U.S. When investment in the U.S. rises, the rate of capital growth increases (factories are built or remodeled). Investments in the U.S. economy also spur research and development, which leads to innovation and technological advances. Increases in the physical capital stock and advances in technology increase the productivity of U.S. labor and other resources, pushing up the market value of workers, thereby increasing domestic incomes and wealth overall.

So, don't get confused when you see a large trade imbalance. All you see, when you look at the trade balance, is the merchandise side, not the financial side of trade."

MacroeconomicsTopic 10: "Explain why the merchandise trade deficit is offsetby capital flows and investment in debtor countries"

78 posted on 02/21/2003 9:45:25 AM PST by lasereye
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