Postings and assignments for students in Econ 3334 at UH
Tuesday, January 29, 2008
More Trade Deficit Analysis
This text is from testimony given before Congress, and suggests the trade deficit is relatively benign. Is there anything that the author is not considering regarding the role of trade deficits?
6 comments:
Anonymous
said...
The article talks about the United States Trade deficit. The author is trying to get the point across that the trade deficit is not worthy of our worry, and he presents various false assumptions that exaggerate the issue. One assumption is that jobs are lost when there is a trade deficit. He points out that in fact trade deficits go hand in hand with low unemployment levels, which he backs up with data from the 1992 recession. In his view, Trade deficits imply economic growth and the United States congress should focus on other economic issues. In Griswold's words, "trade deficit is not a sign of economic distress, but of rising domestic demand and investment". One thing that Griswold forgot to mention is how interest rates play an important part in determining the trade balance of a nation. Because the domestic interest rate is fixed in an open economy, the world interest rate is the key to determining the status of the trade balance. This can be explained with the equation
S-I(r)=NX
This equation shows that with a fixed interest rate, the variable that can affect net exports is S (savings). If savings are less than investments, then net exports will be negative (deficit). During the last presidential terms, Government spending has been high. If we use the other equation in which savings is determined by consumption, disposable income, and government spending;
S=(Y-T-C)+(T-G)
we will see that the increase in government spending has caused total savings to decrease. Because of the fixed nature of domestic interest rates in an open economy, this reduction in savings deviates from the quantity of funds invested, and increased exports are used to offset the difference resulting in the trade deficit. What is the world interest rate? If the world interest is set above the domestic rate while the economy is in a trade deficit, then the deficit could be reduced. In another scenario, perhaps the world interest rate is set below the domestic interest rate, which would result in a trade deficit. This might occur if foreign governments changed their laws to reduce the amount of goods and services that are exported to the US. The world interest would fall below our domestic rate and contribute to a trade deficit. I think it is good to see an optimistic article about the trade deficit because most of the articles in the newspaper make it look bad. I think that Griswold is right about his analysis of the trade deficit, and a good method of presenting the truth helps his suggestion to Congress. Although, in a way, he is saying that the more money we owe, the better.
The article is a testimonial made by Daniel Griswold, Associate Director for the Center for Trade Policy Studies before the Senate Finance Committee. The congressional testimony is about the causes and consequences of the U.S. trade deficit. Trade Deficit is spending > output and imports > exports. Size of the trade deficit = -NX . We are the net borrowers in world financial markets, and we are importing more goods that we are exporting. He presents a more elaborate explanation of the most talked about trade deficit.
Being the most stable and relatively free domestic market, the U.S. market still is the most popular target market for foreign investors. Americans do not save enough money to finance the investment opportunities the economy offers. He explained more that the trade deficit is a mirror image reflection of the macroeconomic reality that investment in the U.S. exceeds domestic savings. He presented a study made by the Cato Institute that addresses four myths about the trade deficit, two of which relate to the causes and two for the consequences.
The first myth is about the inequitable trade barriers with other countries which cause the trade deficit. For example, the United States runs a large trade surplus with Brazil, a country with relatively high trade barriers, while we run deficits with Mexico and Canada, two countries open to U.S. exports. The second myth is the lack of U.S. industrial competitiveness. These two myths contribute to the cause of the trade deficit.
The third myth is about the trade deficit destroying jobs. The empirical effect of the trade deficit on employment indicates a strong correlation between rising trade deficits and falling rates of unemployment. The same expanding economy that elicits demand for labor also raises demand for imported goods and capital. The fourth myth is that trade deficits slow down the U.S. economy.
The findings of the Cato Institute are not that accurate as Griswold has demonstrated. He contradicts every myth presented by the institute. Griswold stated, “That the trade deficits are not a sign of economic distress, but of rising domestic demand and investment”. Moreover, Griswold suggested to the Senate Finance Committee that they should ignore the trade deficit which was contained in the news lately because of the economic turmoil at East Asia. Then he added that the finance committee should concentrate on eliminating the trade barriers whenever they exist.
The article about the testimony of Daniel T. Griswold to the Senate Finance Committee talks about the trade deficit and how turmoil in East Asia is doing this. According to the article the trade deficit is very misunderstood and can lead people to think that it is going to destroy jobs and drag down economic growth.
As we study economics we learn that trade deficit is the result of net inflow of capital: S - I = NX. This means we are importing more than we are exporting.
Trade deficit means: Exports < Imports Y < C + I + G Net Exports< 0 Saving < Investment Net Capital Outflow < 0
The article says that if we want to change the U.S. trade deficit we must change the rate at which Americans save and invest.
Daniel T. Griswold published a study by the Cato Institute and addressed four myths about the U.S. trade deficit. The first myth explained by Griswold is that the overall U.S. trade deficit is caused by unfair trade barriers abroad. Just because a country has a high trade barrier does not mean it will cause a trade deficit.
The second myth described by Griswold is that the trade deficits are caused by a lack of U.S. industrial competitiveness. The industrial economy of the US has continued to grow over the years and still we have a deficit. According to the article, the American people sell more goods and services in the global marketplace than people of any other country.
The third myth is that trade deficits destroy jobs. With output going up that should show that there is still lots of work being done. The article states that there is a strong correlation between rising trade deficits and falling rates of empolyment. It also states that the same expanding economy that stimulates demand for labor also raises demand for imported goods and capital.
The final myth is that trade deficits are a drag on the U.S. economy. This seems to be caused by the falling demand for our exports in the Far East.
The article talks about how the Senate Fiance Committee should be more concerned with a trade surplus than the trade deficit. within a trade surplus there will be more unempolyment due low domestic demand. Its main focus should be on resucing ans eliminating trade barriers.
I found this artlicle to be very informative and helped to understand what can acatually go on during these specific times.
According to the second accounting identity, changing the current-account balance requires changing saving, investment, or both. Events in the trade sector of the magnitude normally encountered have no significant, sustained effects on aggregate saving or investment. Such events include reduced demand for U.S. exports as a result of recessions in foreign markets, the trade policies of U.S. trading partners (even large partners such as Japan, Canada, Mexico, China, or the European Union), or any U.S. trade policy other than severe restrictions on all or almost all imports. Such events can cause temporary, unintended changes. The U.S. current-account deficits of the past two decades were brought on primarily by a long downward trend in domestic saving as a percentage of GDP that changed over time. The decline led to a shortage of funds for domestic investment, which in turn caused real (inflation-adjusted) interest rates to rise higher than they would otherwise have been. The higher interest rates attracted inflows of financial capital from abroad. The need to convert those inflows from foreign currencies into dollars increased the demand for dollars in foreign exchange markets and thereby put upward pressure on the value of the dollar relative to other currencies. As saving declined as a percentage of GDP, consumption consequently increased. The rise in consumption was larger than the decline in gross domestic investment that was induced by the higher interest rates. As a result, total domestic demand for goods and services--consumption plus investment--increased, putting upward pressure on the prices of U.S. output. The account deficit has also fluctuated with the business cycle. When a country experiences an economic boom, its investment typically rises faster than its saving, so its current-account surplus declines (or its deficit increases). During a recession, investment typically falls faster than saving, so the current-account surplus increases (or the deficit declines). Similarly, aggregate demand (including that for imports) increases during an economic expansion and falls during a recession .Since the trade deficit is an excess of imports over exports and obviously hurts some people, it would seem on the surface to be a problem of international trade that might be fixed or alleviated by the tools of trade policy. In fact, however, it is not. Its cause lies not in international trade but in factors affecting international capital flows. In the case of the recent U.S. trade deficits, those factors are largely of domestic origin--a long decline in saving, a prolonged upswing in the business cycle, and perhaps a number of changes in the U.S. economy that have made it a particularly productive place for international investors to put their funds. Although some people are harmed by the deficits, others are helped. On balance, the continuing deficits have small, beneficial consequences for the United States.
The article discusses the current trade deficit that the United States US has. The intent of the author is to convey to the reader that there is little to worry about regarding a higher trade deficit and that most of the concerns regarding it stem from false assumptions which are often propagated by the media. He then goes on to discuss examples among the various false notions and explains why they should be ignored. To further his point, he demonstrates that net exports are inversely proportional with employment—higher trade deficits mean higher employment—which is supported by data from the recession in 1992. The author provides an alternative way of viewing trade deficit: increased economic growth and increased domestic demand and investment.
Not explained in the article is the role of interest rates in determining net exports: the mechanism behind the deficit. Domestic interest rates are generally fixed in an open economy and as such the world interest rate determines the trade balance, as expressed by S-I(r)=NX. A trade deficit is noted by a negative NX. According to this equation, what could cause NX to go down? There are only two things: a decrease in total saving or an increase in investment. Both of these things are favorable because increased investment increases the growth rate and decreased savings amounts to higher output. This can be summed up as follows, pointed out previously:
Trade deficit means: Exports < Imports Y < C + I + G Net Exports< 0 Saving < Investment Net Capital Outflow < 0
The likely cause of the trade deficit is a marked decrease in savings mostly caused by a large steady increase in government spending and tax reductions.
My reaction to this article is entirely positive. The role of the responsible economist is to educate others and dispel politically motivated misconceptions of the economy. Nobody is aided by a false view of the economy in the long run.
In a testimony by Daniel T. Griswold, he explains the causes and consequences of the U.S. trade deficit. He goes on to say how often the trade deficit is talked about but not well understood. Griswold states it is proof that many do not understand the trade deficit by people stating there are “unfair trade barriers abroad, lack of competitiveness among U.S. industries at home, it destroys jobs and, it drags down economic growth.” The author goes on to state that if we want to change the trade deficit then it is up to us to change the way we save and invest. He then goes on to address four myths about the U.S. trade deficit. The first myth he address is about trade barriers and how it does not determine the overall trade deficit. The second myth Griswold address is lack of US. Industrial competitiveness and how production in the U.S. is growing, in fact Americans sell more goods and services than any other people in the global market place. The third myth that is mentioned is how trade deficits destroy jobs. Griswold said that since the trade deficit is growing, so has American payrolls. The last myth that is talked about in the testimony is trade deficits slow down the U.S. economy. The slow down is the demand for the country’s exports has gone down. Griswold stated that the economy has grown more on average when the country has a growing deficit then when the trade deficit has shrunk. He then talks about how the country should worry if we had a trade surplus and talks about the high employment associated with it. In the end he states that there is no emergency and new trade barriers will only make us worse off.
Like the article, the text states that a trade deficit is when importing exceed exporting. Other things that are outcomes from trade deficits are net exports being less than zero, output is less than consumption investment and government purchases combined as well as well as savings less than investment.
I like how the author points out how we can shrink the trade deficit by saving more. The country does not save much at all compared to other countries. He used facts and statistics to prove the illegitimacy of all the myths that those have about the trade deficit. This article in particular is useful in the sense that it goes against all the things I have heard about the country’s trade deficit. I feel like this article and many of the other articles posted on the site need to be a topic of discussion amongst more people especially those in the media. It seems that I hear far more negatives about the trade deficit then what I should, I guess that is just media though.
6 comments:
The article talks about the United States Trade deficit. The author is trying to get the point across that the trade deficit is not worthy of our worry, and he presents various false assumptions that exaggerate the issue. One assumption is that jobs are lost when there is a trade deficit. He points out that in fact trade deficits go hand in hand with low unemployment levels, which he backs up with data from the 1992 recession. In his view, Trade deficits imply economic growth and the United States congress should focus on other economic issues. In Griswold's words, "trade deficit is not a sign of economic distress, but of rising domestic demand and investment".
One thing that Griswold forgot to mention is how interest rates play an important part in determining the trade balance of a nation. Because the domestic interest rate is fixed in an open economy, the world interest rate is the key to determining the status of the trade balance. This can be explained with the equation
S-I(r)=NX
This equation shows that with a fixed interest rate, the variable that can affect net exports is S (savings). If savings are less than investments, then net exports will be negative (deficit). During the last presidential terms, Government spending has been high. If we use the other equation in which savings is determined by consumption, disposable income, and government spending;
S=(Y-T-C)+(T-G)
we will see that the increase in government spending has caused total savings to decrease. Because of the fixed nature of domestic interest rates in an open economy, this reduction in savings deviates from the quantity of funds invested, and increased exports are used to offset the difference resulting in the trade deficit.
What is the world interest rate? If the world interest is set above the domestic rate while the economy is in a trade deficit, then the deficit could be reduced. In another scenario, perhaps the world interest rate is set below the domestic interest rate, which would result in a trade deficit. This might occur if foreign governments changed their laws to reduce the amount of goods and services that are exported to the US. The world interest would fall below our domestic rate and contribute to a trade deficit.
I think it is good to see an optimistic article about the trade deficit because most of the articles in the newspaper make it look bad. I think that Griswold is right about his analysis of the trade deficit, and a good method of presenting the truth helps his suggestion to Congress. Although, in a way, he is saying that the more money we owe, the better.
The article is a testimonial made by Daniel Griswold, Associate Director for the Center for Trade Policy Studies before the Senate Finance Committee. The congressional testimony is about the causes and consequences of the U.S. trade deficit. Trade Deficit is spending > output and imports > exports. Size of the trade deficit = -NX . We are the net borrowers in world financial markets, and we are importing more goods that we are exporting. He presents a more elaborate explanation of the most talked about trade deficit.
Being the most stable and relatively free domestic market, the U.S. market still is the most popular target market for foreign investors. Americans do not save enough money to finance the investment opportunities the economy offers. He explained more that the trade deficit is a mirror image reflection of the macroeconomic reality that investment in the U.S. exceeds domestic savings. He presented a study made by the Cato Institute that addresses four myths about the trade deficit, two of which relate to the causes and two for the consequences.
The first myth is about the inequitable trade barriers with other countries which cause the trade deficit. For example, the United States runs a large trade surplus with Brazil, a country with relatively high trade barriers, while we run deficits with Mexico and Canada, two countries open to U.S. exports. The second myth is the lack of U.S. industrial competitiveness. These two myths contribute to the cause of the trade deficit.
The third myth is about the trade deficit destroying jobs. The empirical effect of the trade deficit on employment indicates a strong correlation between rising trade deficits and falling rates of unemployment. The same expanding economy that elicits demand for labor also raises demand for imported goods and capital. The fourth myth is that trade deficits slow down the U.S. economy.
The findings of the Cato Institute are not that accurate as Griswold has demonstrated. He contradicts every myth presented by the institute. Griswold stated, “That the trade deficits are not a sign of economic distress, but of rising domestic demand and investment”. Moreover, Griswold suggested to the Senate Finance Committee that they should ignore the trade deficit which was contained in the news lately because of the economic turmoil at East Asia. Then he added that the finance committee should concentrate on eliminating the trade barriers whenever they exist.
Benz said...
The article about the testimony of Daniel T. Griswold to the Senate Finance Committee talks about the trade deficit and how turmoil in East Asia is doing this. According to the article the trade deficit is very misunderstood and can lead people to think that it is going to destroy jobs and drag down economic growth.
As we study economics we learn that trade deficit is the result of net inflow of capital:
S - I = NX. This means we are importing more than we are exporting.
Trade deficit means:
Exports < Imports
Y < C + I + G
Net Exports< 0
Saving < Investment
Net Capital Outflow < 0
The article says that if we want to change the U.S. trade deficit we must change the rate at which Americans save and invest.
Daniel T. Griswold published a study by the Cato Institute and addressed four myths about the U.S. trade deficit. The first myth explained by Griswold is that the overall U.S. trade deficit is caused by unfair trade barriers abroad. Just because a country has a high trade barrier does not mean it will cause a trade deficit.
The second myth described by Griswold is that the trade deficits are caused by a lack of U.S. industrial competitiveness. The industrial economy of the US has continued to grow over the years and still we have a deficit. According to the article, the American people sell more goods and services in the global marketplace than people of any other country.
The third myth is that trade deficits destroy jobs. With output going up that should show that there is still lots of work being done. The article states that there is a strong correlation between rising trade deficits and falling rates of empolyment. It also states that the same expanding economy that stimulates demand for labor also raises demand for imported goods and capital.
The final myth is that trade deficits are a drag on the U.S. economy. This seems to be caused by the falling demand for our exports in the Far East.
The article talks about how the Senate Fiance Committee should be more concerned with a trade surplus than the trade deficit. within a trade surplus there will be more unempolyment due low domestic demand. Its main focus should be on resucing ans eliminating trade barriers.
I found this artlicle to be very informative and helped to understand what can acatually go on during these specific times.
According to the second accounting identity, changing the current-account balance requires changing saving, investment, or both. Events in the trade sector of the magnitude normally encountered have no significant, sustained effects on aggregate saving or investment. Such events include reduced demand for U.S. exports as a result of recessions in foreign markets, the trade policies of U.S. trading partners (even large partners such as Japan, Canada, Mexico, China, or the European Union), or any U.S. trade policy other than severe restrictions on all or almost all imports. Such events can cause temporary, unintended changes. The U.S. current-account deficits of the past two decades were brought on primarily by a long downward trend in domestic saving as a percentage of GDP that changed over time. The decline led to a shortage of funds for domestic investment, which in turn caused real (inflation-adjusted) interest rates to rise higher than they would otherwise have been. The higher interest rates attracted inflows of financial capital from abroad. The need to convert those inflows from foreign currencies into dollars increased the demand for dollars in foreign exchange markets and thereby put upward pressure on the value of the dollar relative to other currencies. As saving declined as a percentage of GDP, consumption consequently increased. The rise in consumption was larger than the decline in gross domestic investment that was induced by the higher interest rates. As a result, total domestic demand for goods and services--consumption plus investment--increased, putting upward pressure on the prices of U.S. output. The account deficit has also fluctuated with the business cycle. When a country experiences an economic boom, its investment typically rises faster than its saving, so its current-account surplus declines (or its deficit increases). During a recession, investment typically falls faster than saving, so the current-account surplus increases (or the deficit declines). Similarly, aggregate demand (including that for imports) increases during an economic expansion and falls during a recession .Since the trade deficit is an excess of imports over exports and obviously hurts some people, it would seem on the surface to be a problem of international trade that might be fixed or alleviated by the tools of trade policy. In fact, however, it is not. Its cause lies not in international trade but in factors affecting international capital flows. In the case of the recent U.S. trade deficits, those factors are largely of domestic origin--a long decline in saving, a prolonged upswing in the business cycle, and perhaps a number of changes in the U.S. economy that have made it a particularly productive place for international investors to put their funds. Although some people are harmed by the deficits, others are helped. On balance, the continuing deficits have small, beneficial consequences for the United States.
The article discusses the current trade deficit that the United States US has. The intent of the author is to convey to the reader that there is little to worry about regarding a higher trade deficit and that most of the concerns regarding it stem from false assumptions which are often propagated by the media. He then goes on to discuss examples among the various false notions and explains why they should be ignored. To further his point, he demonstrates that net exports are inversely proportional with employment—higher trade deficits mean higher employment—which is supported by data from the recession in 1992. The author provides an alternative way of viewing trade deficit: increased economic growth and increased domestic demand and investment.
Not explained in the article is the role of interest rates in determining net exports: the mechanism behind the deficit. Domestic interest rates are generally fixed in an open economy and as such the world interest rate determines the trade balance, as expressed by S-I(r)=NX. A trade deficit is noted by a negative NX. According to this equation, what could cause NX to go down? There are only two things: a decrease in total saving or an increase in investment. Both of these things are favorable because increased investment increases the growth rate and decreased savings amounts to higher output. This can be summed up as follows, pointed out previously:
Trade deficit means:
Exports < Imports
Y < C + I + G
Net Exports< 0
Saving < Investment
Net Capital Outflow < 0
The likely cause of the trade deficit is a marked decrease in savings mostly caused by a large steady increase in government spending and tax reductions.
My reaction to this article is entirely positive. The role of the responsible economist is to educate others and dispel politically motivated misconceptions of the economy. Nobody is aided by a false view of the economy in the long run.
In a testimony by Daniel T. Griswold, he explains the causes and consequences of the U.S. trade deficit. He goes on to say how often the trade deficit is talked about but not well understood. Griswold states it is proof that many do not understand the trade deficit by people stating there are “unfair trade barriers abroad, lack of competitiveness among U.S. industries at home, it destroys jobs and, it drags down economic growth.” The author goes on to state that if we want to change the trade deficit then it is up to us to change the way we save and invest. He then goes on to address four myths about the U.S. trade deficit. The first myth he address is about trade barriers and how it does not determine the overall trade deficit. The second myth Griswold address is lack of US. Industrial competitiveness and how production in the U.S. is growing, in fact Americans sell more goods and services than any other people in the global market place. The third myth that is mentioned is how trade deficits destroy jobs. Griswold said that since the trade deficit is growing, so has American payrolls. The last myth that is talked about in the testimony is trade deficits slow down the U.S. economy. The slow down is the demand for the country’s exports has gone down. Griswold stated that the economy has grown more on average when the country has a growing deficit then when the trade deficit has shrunk. He then talks about how the country should worry if we had a trade surplus and talks about the high employment associated with it. In the end he states that there is no emergency and new trade barriers will only make us worse off.
Like the article, the text states that a trade deficit is when importing exceed exporting. Other things that are outcomes from trade deficits are net exports being less than zero, output is less than consumption investment and government purchases combined as well as well as savings less than investment.
I like how the author points out how we can shrink the trade deficit by saving more. The country does not save much at all compared to other countries. He used facts and statistics to prove the illegitimacy of all the myths that those have about the trade deficit. This article in particular is useful in the sense that it goes against all the things I have heard about the country’s trade deficit. I feel like this article and many of the other articles posted on the site need to be a topic of discussion amongst more people especially those in the media. It seems that I hear far more negatives about the trade deficit then what I should, I guess that is just media though.
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