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Tuesday, November 22, 2016

Economics 101 Trade

I was very glad to see Trump start talking about trade when he first started campaigning.  They had a number of debates on CNBC on the subject.  Unfortunately those debates indicated just how ignorant of economics many people are.  The anti trade argument usually mentions the loss of manufacturing jobs.  The pro argument usually centers on cheaper prices for consumers being good.  Just once I would like to see somebody talk about basic economics.  Here is the high level formula for GDP standard in any basic economic text book.

GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).
Y = C + I + G + (X − M)
It is the part in parentheses that deals with trade.  Notice the calculation is exports minus imports.  That means a trade surplus adds to GDP while a trade deficit subtracts from GDP.  While GDP is useless in real time for economic analysis the final numbers (years after the fact) provide a reasonable measurement of growth.  I think everybody would agree that the more growth a country has the better it is.  Running trade deficits subtracts from GDP.  That is obviously bad.  That is not debatable.  And yet it is debated.  Here is a look at the U.S. balance of trade.

As you can easily see the U.S. has been running chronic trade deficits since around 1976.  Both parties have been complicit in purposely lowering our GDP and therefore our standard of living.  They pursued poor trade agreements.  This is undeniable.  It is simply basic economics.

Toward the end of the last decade China had a trade surplus over 10% of GDP.  The government built up over $3 trillion of foreign reserves from their profitable trade operations.  The most recent data I saw show that surplus is down to about 2% of GDP.  That has resulted in China's foreign reserves declining as they spend to try to keep their massive bubble economy afloat.  Meanwhile the U.S. with our trade deficits has managed to rack up $20 trillion in debt and lowered the U.S. standard of living so much Donald Trump got elected president.  Trade matters, but it must be done fairly. Trade deficits are not helpful in any way.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.