1 Lecture 12 The Balance of Trade and International Transactions Econ 340 Econ 340, Deardorff, Lecture 12: Trade Balance 2 Outline: The Balance of Trade and International Transactions • What Is the Balance of Trade? • What the Balance of Trade Does Not Mean • International Transactions – Current Account – Financial Account • What the Balance of Trade Does Mean – From Balance of Payments Accounting – From National Income Accounting Econ 340, Deardorff, Lecture 12: Trade Balance 3 What Is It? • Definition: Balance of Trade = Exports minus Imports – Defined for • Merchandise (i.e., goods) = “Balance on Merchandise Trade” • Merchandise plus services = “Balance on Goods and Services” – “Trade Surplus” = Bal of Trade > 0 – “Trade Deficit” = Bal of Trade < 0 Econ 340, Deardorff, Lecture 12: Trade Balance 4 Outline: The Balance of Trade and International Transactions • What Is the Balance of Trade? • What the Balance of Trade Does Not Mean • International Transactions – Current Account – Financial Account • What the Balance of Trade Does Mean – From Balance of Payments Accounting – From National Income Accounting Econ 340, Deardorff, Lecture 12: Trade Balance 5 What It Does Not Mean • Common Misinterpretations – That a deficit means we are “losing money” • This was sort of true when – All money was gold (the Gold Standard), and – There were no international capital flows – Then imports > exports meant you were spending more gold than you were earning • Today there are capital flows – A country with imports > exports can » Borrow » Sell assets to foreigners Econ 340, Deardorff, Lecture 12: Trade Balance 6 • Common Misinterpretations – That a deficit means we are “losing jobs” • It is true that – Imports are goods we don’t produce, and – Exports are goods we do produce • But whether an increase in imports means a loss of jobs depends on why imports went up – Often it is because more people are working, earning income, and buying more from abroad What It Does Not Mean2 Econ 340, Deardorff, Lecture 12: Trade Balance 7 • Common Misinterpretations – That a deficit means we are “losing jobs” • Scott draws a direct connection from exports to jobs gained and from imports to jobs lost – He assumes that imports somehow replace domestic production. – That is sometimes true, but mostly it is not • Griswold points out that the US economy has done best when the trade deficit was growing! – True, but that doesn’t mean that the trade deficit caused us to do well – Instead, high incomes led to higher imports What It Does Not Mean Econ 340, Deardorff, Lecture 12: Trade Balance 8 • Common Misinterpretations – That a deficit means other countries are misbehaving • Not at all, as we’ll see. What It Does Not Mean Econ 340, Deardorff, Lecture 12: Trade Balance 9 Outline: The Balance of Trade and International Transactions • What Is the Balance of Trade? • What the Balance of Trade Does Not Mean • International Transactions – Current Account – Financial Account • What the Balance of Trade Does Mean – From Balance of Payments Accounting – From National Income Accounting Econ 340, Deardorff, Lecture 12: Trade Balance 10 International Transactions • To understand the trade balance, it is necessary to consider all international transactions – Trade – Financial flows also – Transfer payments, i.e. gifts (this is small for U.S. but large for some developing countries: e.g., foreign aid and remittances) Econ 340, Deardorff, Lecture 12: Trade Balance 11 International Transactions • Transactions are divided into two* parts, called – Current Account – Financial Account *There are also two other small items, not part of these two accounts, called – Capital Account – Statistical Discrepancy We’ll mostly ignore these in this course Econ 340, Deardorff, Lecture 12: Trade Balance 12 International Transactions – Current Account • Trade in goods • Trade in services • Investment income • Unilateral transfers (i.e, gifts, foreign aid) – Financial Account – Includes only changes in asset holdings • Δ (change in) US ownership of assets abroad • Δ foreign ownership of assets in US3 Econ 340, Deardorff, Lecture 12: Trade Balance 13 International Transactions • All transactions are recorded as either – Credits (+) • If they correspond to payment into the country – E.g., exports, capital inflows or – Debits (−) • If they correspond to payment out of the country – E.g., imports, capital outflows Econ 340, Deardorff, Lecture 12: Trade Balance 14 International Transactions • Balances – Balance of Trade = credits minus debits on trade transactions (merchandise only, or goods and services) – Balance on Current Account = credits minus debits on trade, investment income, and transfers – Balance on Financial Account = Also called net “capital inflows” TABLE 9.3 The U.S. Balance of Payments, 2011 • Balance of payments = current account + capital account + financial account TABLE 9.2 The U.S. Current Account Balance, 2011 TABLE 9.4 Components of the U.S. Financial Account, 2011 TABLE 9.5 Private Flows in the U.S. Financial Account, 2011 FDI4 FIGURE 9.1 U.S. Current Account Balances, 1960-2011 Current Account is mostly the Trade Balance, which deteriorated greatly from 1990 until 2005 International Transactions: Data Econ 340, Deardorff, Lecture 12: Trade Balance 20 More recently, from Survey of Current Business January 2014 Econ 340, Deardorff, Lecture 12: Trade Balance 21 International Transactions: Data US Export and Import Shares Since 1962 (Shaded strips are recessions) Source: Survey of Current Business February 2013 Econ 340, Deardorff, Lecture 12: Trade Balance 22 Survey of Current Business January 2014 $m. U.S. International Transactions Econ 340, Deardorff, Lecture 12: Trade Balance 23 Survey of Current Business January 2014 $m. Econ 340, Deardorff, Lecture 12: Trade Balance 24 Survey of Current Business January 2014 $m.5 Econ 340, Deardorff, Lecture 12: Trade
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