You often read and hear a lot of hand-wringing about the current account deficit -- aka the trade deficit. The significance of it really escapes me. Ever since I was a kid people have been warning that it was undermining the U.S. economy and would eventually lead to some terrible reckoning. Indeed, I was at the Heritage Foundation the other week when a Republican Capitol Hill staffer stated that the U.S. buys everything from overseas while only exporting "Starbucks and beef" and hinted at a possible looming depression.
Please.
All the current account gap means is that we import more than we export. Conversely, if you're running a trade deficit it means that you are running a capital surplus -- i.e. more money is coming into the country that out of it (that money is needed, of course, to pay for all of the stuff you're importing). Now, which drives which? Do we import goods because we're so rich from all the money that is being invested here? Or does our appetite for foreign goods lead us to suck in capital from overseas?
I think it's the former, but I'm probably in the minority.
But that aside, consider this: If the trade deficit is such a problem, why is it that prosperous countries often run such deficits? And why is it that many slower growth economies that run surpluses?
In today's Financial Times for example there is an article that says "Economists warn Iceland's economy is overheating." According to the CIA Factbook Iceland's economy grew at an impressive 5.9% clip last year. The FT article, meanwhile, notes that it's current account deficit is around 7% of its Gross Domestic Product. That's big.
While I was at the CIA website I decided to look up which economies have the biggest trade deficits and surpluses. Unfortunately they are only given in absolute terms rather than as a percentage of GDP size, but they're still interesting. The top 5 countries running deficits, along with their GDP numbers, are:
1. USA -- 3.5%
2. Spain -- 3.3%
3. Australia -- 2.7%
4. United Kingdom -- 1.8%
5. France -- 1.5%
Those running the biggest surpluses (in absolute terms) are:
1. Japan -- 2.1%
2. China -- 9.2%
3. Germany -- 0.80%
4. Russia -- 5.9%
5. Saudi Arabia -- 6.4%
Now, this suffers from some flaws as China is a developing country and therefore has a higher potential growth rate and Russia and Saudi Arabia both benefit (as does #6 Norway) from huge oil exports. Regardless, I think at the very least we can say that the notion a trade gap=economic doom is waaaay overstated.
Please.
All the current account gap means is that we import more than we export. Conversely, if you're running a trade deficit it means that you are running a capital surplus -- i.e. more money is coming into the country that out of it (that money is needed, of course, to pay for all of the stuff you're importing). Now, which drives which? Do we import goods because we're so rich from all the money that is being invested here? Or does our appetite for foreign goods lead us to suck in capital from overseas?
I think it's the former, but I'm probably in the minority.
But that aside, consider this: If the trade deficit is such a problem, why is it that prosperous countries often run such deficits? And why is it that many slower growth economies that run surpluses?
In today's Financial Times for example there is an article that says "Economists warn Iceland's economy is overheating." According to the CIA Factbook Iceland's economy grew at an impressive 5.9% clip last year. The FT article, meanwhile, notes that it's current account deficit is around 7% of its Gross Domestic Product. That's big.
While I was at the CIA website I decided to look up which economies have the biggest trade deficits and surpluses. Unfortunately they are only given in absolute terms rather than as a percentage of GDP size, but they're still interesting. The top 5 countries running deficits, along with their GDP numbers, are:
1. USA -- 3.5%
2. Spain -- 3.3%
3. Australia -- 2.7%
4. United Kingdom -- 1.8%
5. France -- 1.5%
Those running the biggest surpluses (in absolute terms) are:
1. Japan -- 2.1%
2. China -- 9.2%
3. Germany -- 0.80%
4. Russia -- 5.9%
5. Saudi Arabia -- 6.4%
Now, this suffers from some flaws as China is a developing country and therefore has a higher potential growth rate and Russia and Saudi Arabia both benefit (as does #6 Norway) from huge oil exports. Regardless, I think at the very least we can say that the notion a trade gap=economic doom is waaaay overstated.
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