No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 371 terms give it away—aren’t surpluses good and deficits bad? Well, in this case we need to dig a little deeper— first by defining some terms. To begin with, we need to understand what people mean when they talk about the “ trade deficit .” Often they mean the difference between our exports of goods (e.g., Boeing aircraft) and our imports of goods (like oil), but they fail to consider services in the discussion. While services were relatively unimportant to our economy 50 years ago, the services sector (like banking, insurance, or technical engineering support) is a large driver of our economy. The reason some usually make this distinction is they are primarily concerned about the trade deficit’s impact on domestic manufacturing jobs (historically, higher wage union jobs). But from a national perspective, a narrow view is just that—narrow! Consider Figure 15.6 as a way to think about trade and financial flows. The most important thing to understand is that the overarching category is called the balance of payments (BOP), and it ALWAYS balances! So if we have a deficit in one area of the balance of payments, we must have a surplus in another area. The BOP will balance! To see how this all fits together, let’s begin at the bottom of Figure 15.6 . The trade deficit or trade surplus is broadly called the balance of trade and is simply the difference between the amount of goods and services we export and the goods and services we import. It is part of the current account (CA—called current since it deals with transactions limited to the present), which also includes net factor income (NFI— the difference in how much we make from our overseas investments and how much foreigners make from their U.S. investments) and net foreign payments (NFP—like foreign aid). So for example, if we export $100 million of machine tools, and $200 million in financial services, while importing $400 million of automobiles, we would have a negative balance of trade of $100 million (a trade deficit ). If our NFI and NFP were equal to zero, we would also have a CA deficit of $100 million. In this case, foreigners are serving us more than we are serving them—they are giving us more goods and services than they are taking. Sounds like a deficit is actually a pretty good deal, huh? Balance of trade: the difference between the amount of goods and services we export and the goods and services we import. Trade surplus: This occurs when exports of goods and services produced in a country are greater than imports Trade deficit: This occurs when exports of goods and services produced in a country are less than imports. Figure 15.5, Trade Balance over time. The United States has consistently run trade deficits since the 1970s. Source Macrotrends, underlying data from the World Bank