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Friday, July 20, 2007

Trade Deficit? So What?

There is a lot of "bollocks" written about trade deficits. We're supposed to worry about importing more than we export. I think its good to get a lot for a little. Isn't that successful business?

This column from the Australian Centre for Independent Studies, puts it in perspective.

Trade deficit's poor image

Alex Robson

It's not the trade deficit that matters, writes Alex Robson

ON Wednesday the Australian Bureau of Statistics released its monthly figures for Australia's merchandise trade in goods and services with the rest of the world for the month of May.

The data reveals that in seasonally adjusted terms the value of Australia's exports was $18.7 billion and the value of our imports was $19.5 billion, giving a deficit of just over $800 million.

What does this mean? Some economists had expected the deficit to be higher than this. The low figure was supposedly good news.

These commentators would have us believe that when it comes to trade deficits, smaller is better. In fact, according to some of them we'd all be better off if the trade deficit simply disappeared altogether, or if the deficit turned into a surplus.

But are those propositions really true? To see why they aren't, we need to explore exactly what the trade statistics measure.

Let's take a simple example: suppose the ABS goes out and measures merchandise trade between you and your local Bunnings store for July.

Suppose you really need a barbecue. If you go to Bunnings and buy one for $99 in July, then the data will show that you "imported" a barbecue from Bunnings but exported nothing to them, giving you a monthly trade deficit of $99 with the hardware store.

Cash isn't regarded as a good or a service, so the $99 you pay Bunnings isn't counted as an export. Instead, the ABS regards it as a transfer of assets.

On the other hand, suppose that you aim for perfectly "balanced" trade.

Since it is unlikely that Bunnings will ever buy anything from you, the only way this can happen is if you don't buy the barbecue – even though you really want it.

The ABS would then report that you imported and exported nothing from Bunnings, giving you a perfectly balanced merchandise trade account.

It doesn't take a university economics degree to work out that the first outcome is better – even though the data will show you running a trade deficit. You will be better off because you will end up with a barbecue which you believe is worth at least $99.

If, as all those economics commentators tell us, Australia's trade deficit with the rest of the world is really all that bad, then surely all of the trade deficits between Bunnings and its customers must be just as unpleasant.

The peculiar thing about the "smaller trade deficits are better" mantra is that nobody really believes it.

You can bet that the majority of economists have magnificent barbecues in their backyards, because at some point they happily ran a trade deficit with Bunnings or one of the dozens of other outdoor stores.

We're also frequently told that "cheap imports" are bad. But if Bunnings raises the price of a barbecue to $199, how would I be better off?

Since there is no way that I could ever produce a barbecue myself, my living standards depend on the willingness of others to supply me with "cheap imports".

The key lesson in all of this is that the trade deficit figures are worse than useless for measuring what really matters: how the ability of individuals to trade freely with one another improves everyone's living standards.


Blogger Unknown said...

Yeah, but if you substitute "everyone else but you" for Bunnings in your example, then you'd eventually hit real problems.

The money you own is reward for value you've created. If you consistently acquire more value than you've created, you will go broke. Perhaps you need to change what you create so that it's as desirable as the things you want. You need everyone to want to buy something from you that they value as highly as you value the BBQ and to repeat this across all transactions. You will still both be better off, but sustainably so.

The complexity arises from bringing this up to the national level. The national trade deficit is just the aggregation of many individual trade deficits, but unfortunately we are effected as a group. We have a shared currency etc. If the whole word used a single system (ideally, a free market one) then trade deficits between NZ and the RoW would be no bigger deal than Northland's deficit or surplus with Southland. The system should support each individual economic entity (i.e. a person or family) managing it's own trade balance.

9:05 AM  
Blogger Trevor Loudon said...

"If you consistently acquire more value than you've created, you will go broke"

Only if you do it on credit Camryn
Of course we can't consume more than we create. The joy of capitalism is that we can get a lot for bugger all effort.

I think the point of the article is that comparing inward and outward flows of cash and credit tells you very little.

The reakl measure is what can you ppurchase with X amount of labour ie how long does it take for the average worker on the average wage to purchase a given commodity-Big Mac, 3 bedroom house etc.

That is the best measure of a countries economic health.

2:19 PM  

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