[OPE-L] Trade Deficit Disorder

From: Jurriaan Bendien (adsl675281@TISCALI.NL)
Date: Tue Mar 21 2006 - 11:28:37 EST

The term trade deficit should not be equated with the current account
deficit, because the latter refers not just to a negative balance of imports
vs exports of goods and services, but also capital income flows. In the US,
income receipts (as distinct from the payments relating to the value of
goods and services traded internationally) were in 2004 about 26% of total
current receipts from the rest of the world, and about 16% of current
payments to the rest of the world.

Also, in the UK example, the balance of trade on goods is generally
negative, and the balance of trade on services is positive.

If a country imports more capital than it exports, then this has a negative
effect on the current account balance, but nobody in the country will object
to it much - the capital account will show a surplus. If a country exports
more capital than it imports, it might be considered a bad thing insofar
as it represents capital flight.

The real problem is with the current account concept itself, since it does
not show clearly the disposition of capital funds (i.e. exactly where they
go, where they are invested). The current account is itself not a good
statement of the total investment position of a country. It's merely a
current national debtor-creditor payments statement.

BEA comments: "The U.S. net international investment position at yearend
2004 was -$2,484.2 billion (preliminary) with direct investment valued at
current cost, as the value of foreign investments in the United States
exceeded the value of U.S. investments abroad. The -$327.5 billion change in
the net investment position from yearend 2003 to yearend 2004 was largely
due to substantial net foreign purchases of U.S. Treasury securities and
U.S. corporate bonds.  The impact of these net purchases was partly offset
by appreciation of most foreign currencies against the U.S. dollar, which
raised the dollar value of U.S.-owned assets abroad, especially of
U.S.-owned foreign stocks.  In addition, increases in stock market prices
raised the value of U.S. holdings of foreign stocks somewhat more than they
raised the value of foreign holdings of U.S. stocks."

In reality, both US acquisitions abroad, and foreign acquisitions in the US,
reached record levels


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