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Chris -- sound right??

Author: conorlarkin (20790 Posts - Original UHND Member)

Posted at 11:35 am on Apr 5, 2025
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Macroeconomics
Topic 10: “Explain why the merchandise trade deficit is offset by capital flows and investment in debtor countries.”
Reference: Gregory Mankiw’s Principles of Macroeconomics, 2nd edition, Chapter 17.

The Merchandise Trade Deficit

The U.S. trade balance has been in a deficit position since the 1970s. This means that the total value of imported goods has been greater than the total value of exported goods.

This means the U.S. is a “debtor” nation, running a merchandise trade deficit. However, the merchandise trade deficit refers only to imports and exports of goods and services. It shows that imports are greater than exports, hence the “deficit.” But, think about it for a minute, why does the world keep giving us goods, without getting goods from us in return? Is this a good deal or what? Well, clearly, this can’t be the whole story. What is happening is that the people from whom we buy goods abroad are taking our dollars investing in the U.S. economy. They may buy U.S. government debt (securities issued by the U.S. government to finance past federal budget deficits) or other assets in the U.S. For example, they may invest in U.S. companies.

Net foreign investment

Net foreign investment equals the amount that foreigners invest in the U.S. (their purchase of assets here) minus the amount that U.S. residents invest abroad (U.S. residents’ purchase of assets in other countries). Net foreign investment generally equals net exports. For example, if you and your neighbors want to buy jackets made in Mexico, a local wholesaler trades dollars for Mexican currency, the peso, and buys the jackets. The person or bank that traded the pesos for dollars must have a plan for those dollars. One possibility is that the person plans to buy something in the U.S.; U.S. exports would rise. Another possibility is that the person plans to invest in the United States (lend money to someone here or actually invest in the U.S. economy, perhaps purchasing stock or buying a company). If the first option is chosen, exports will rise with imports and there will not be a
merchandise trade deficit. However, if the second option holds, there will be a merchandise trade deficit (exports will be less than imports). And, if the “extra” dollars are used by foreigners to invest in the U.S., then net foreign investment (the difference between U.S. investments abroad and the investments of foreign residents in the U.S.) will be negative, equal to the merchandise trade deficit (the value of exports minus imports – referred to as “net exports”).

Net exports equal net foreign investment. In other words: Exports – Imports = U.S. Investments Abroad – Foreign Investments in the U.S. If dollars leave the U.S. to buy foreign goods and they are not used, in turn, to buy goods in the U.S., then they must be used for some other purpose, and that is often direct investment in the U.S. economy. Here is one way to think about it. The total value of all final products produced in a year in the United States is called the Gross Domestic Product or GDP. The total value of final goods produced in the United States equals the total value of what is purchased. These purchases can be broken down into several components:
Consumption Expenditures (C)
Investment Expenditures (I)
Government Spending (G)
Net Exports (Exports – Imports) (NX)

Exports are part of domestic production. Imported goods are produced abroad. Because imports are included in measures of consumption, investment and government expenditures -- yet they are produced abroad – imports must be subtracted out. This can be written:
Y = C + I + G + NX
Or alternatively:
Y – C – G = I + NX

If the economy is closed to international investment, there will be no imports or exports. In this case, domestic saving (S) will tend to equal domestic investment (I) in equilibrium. The interest rate will adjust until the quantity supplied of loanable funds (by those who save) is equal to the quantity demanded of loanable funds (by those who want to invest). But, in an open economy, investments move across countries. If foreign individuals, from whom we purchase goods, decide to use the dollars they earn to invest in the U.S. economy, then NX will be negative and an equal amount of funds will be invested in the U.S. by foreign individuals and firms. Foreigners who hold our dollars will directly invest in the United States. Mathematically, S – NX = I (remember, NX is negative when imports are greater than exports, so “minus NX” is a positive number).

Alternatively, we can write:
S – I = NX
If I > S, this means that NX < 0; in other words funds are flowing into the U.S. from abroad. (We must be borrowing from the rest of the world.)
If I < S, this means that NX > 0; in other words, U.S. savings are flowing out of the U.S. for investment abroad.

One more time: If imports are greater than exports, NX will be negative. Dollars will be in the hands of individuals in foreign countries who do not want to buy goods and services from us but, instead, plan to invest in our economy. A merchandise trade deficit (imports greater than exports) means that net foreign investment is negative as well (more funds are invested in the U.S. than we invest abroad). The dollars that are traded to pay for our imports come back in the form of investments in the U.S. by foreign individuals or companies. We buy goods and services from them, they “buy” investments here.

Is this good or bad? Economists would say “resources are going to their highest valued use.” However, if you are an exporter in the U.S., you won’t like it! Overall, foreign investment has a positive effect on economic activity in the U.S. When investment in the U.S. rises, the rate of capital growth increases (factories are built or remodeled). Investments in the U.S. economy also spur research and development, which leads to innovation and technological advances. Increases in the physical capital stock and advances in technology increase the productivity of U.S. labor and other resources,
pushing up the market value of workers, thereby increasing domestic incomes and wealth overall.

So, don’t get confused when you see a large trade imbalance. All you see, when you look at the trade balance, is the merchandise side, not the financial side of trade.

The Government’s Budget Deficit and the Trade Deficit

As you probably know, the U.S. experiences a budget deficit when the government wants to spend more than it receives in the form of tax revenues. To fund this deficit, the U.S. Treasury borrows money. Some of the funds may come from investors in other countries. They may want to hold U.S. denominated assets (such as U.S. Government Securities, which the U.S. government uses to finance the federal debt). Here is the story:

If U.S. government borrowing pushes up the interest rate in the U.S. (an increase in the demand for loanable funds puts upward pressure on the interest rate), the higher real return will attract foreign funds. If this pulls dollars held by foreigners away from purchasing our exports, the federal budget deficit will be accompanied by a merchandise trade deficit, imports will be greater than exports. When this occurs, the two deficits have been referred to as “twin deficits.” U.S. producers of exported goods are worse off. Why?

Dollars that might be used to buy exports are used, instead, to purchase assets in the United States. This relationship between the two deficits (budget and trade) depends on whether borrowing by the U.S. Treasury alters the real interest rate (the return on lending) in the U.S.
Empirically, it is hard to detect, some studies suggest increased federal borrowing pushes up interest rates in the U.S., others don’t find this result. Arguably, the increased borrowing is so small relative to all borrowing in the country that it does not affect the market.

In other words, the U.S. Treasury may be a “price taker” in the loanable funds market (taking the market interest rate as given). If so, the “twin” deficits are unrelated. Only if the budget deficit leads to higher domestic interest rates can we say that budget deficits affect the magnitude of the merchandise trade deficit.


The American Dream belongs to all of us. — Kamala Harris

Replies to: Chris -- sound right??


Thread Level: 2

A trade deficit is not worrisome. If I sold another country a coke and received a

Author: WestCoastIrishFan (16173 Posts - Original UHND Member)

Posted at 6:07 pm on Apr 5, 2025
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car in return, i’d welcome the trade deficit. The challenge arises when critical needs can be held hostage or when the “surplus” can no longer cover the importer’s needs. This is where politics comes into play.

our workers have not been able to keep up with the loss of domestic manufacturing with new skills. That has to be addressed. Trump is choosing to tackle this by pushing to bring back blue collar manufacturing.

I am not a fan of tariffs. I would have liked to see Trump address our challenges via regulation reduction, tax incentives and changes in educational objectives. Although, we shouldn’t have been so open to trading with other countries for the last 80 years.

Relative to the investment, this simply plays into the argument that trade is largely benefitting the rich. Foreign investment in treasuries and other assets rarely makes its way all the way to the little guy. Our deficit is aiding the top 5% far more than the bottom 95%.


This message has been edited 1 time(s).

Thread Level: 3

Say it aloud: Trump’s tariffs are reckless and foolish.

Author: conorlarkin (20790 Posts - Original UHND Member)

Posted at 8:57 pm on Apr 5, 2025
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(no message)

The American Dream belongs to all of us. — Kamala Harris
Thread Level: 2

I explain this in intro to international relations

Author: Chris94 (36499 Posts - Original UHND Member)

Posted at 12:02 pm on Apr 5, 2025
View Single

The balance of payments is a function of both the capital account balance (money flows) and the current account balance (exports minus imports).

Everyone - including President shit-for-brains - focuses only on the latter.


Thread Level: 3

So in your view, our math doesn’t hold up? Maybe not an issue if this isn’t a balance sheet.

Author: LanceManion (7665 Posts - Joined: Jul 16, 2010)

Posted at 1:24 pm on Apr 5, 2025
View Single

I.e., it’s the start of a negotiation.

Imposing corporate abuse, neglect and greed on deserving victims.
Thread Level: 4

Massive tax increase craters market, dims economic outlook. Morons don't agree, try new lies.

Author: ND521 (9269 Posts - Joined: May 10, 2016)

Posted at 3:20 pm on Apr 5, 2025
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(no message)

God may not care who wins, but His mother does
Thread Level: 4

Agree. Should be obvious.

Author: Hensou (8017 Posts - Joined: Dec 21, 2022)

Posted at 1:47 pm on Apr 5, 2025
View Single

(no message)

Thread Level: 5

Dummy cheers for other dummies!

Author: ND521 (9269 Posts - Joined: May 10, 2016)

Posted at 3:24 pm on Apr 5, 2025
View Single

(no message)

God may not care who wins, but His mother does
Thread Level: 4

Ditto 94’s post 2 down.

Author: Frank L (64094 Posts - Joined: Sep 20, 2007)

Posted at 1:35 pm on Apr 5, 2025
View Single

(no message)

Thread Level: 5

Thanks Mr. Chicken Little business owner. THE SKY IS FALLING!!!

Author: LanceManion (7665 Posts - Joined: Jul 16, 2010)

Posted at 1:37 pm on Apr 5, 2025
View Single

(no message)

Imposing corporate abuse, neglect and greed on deserving victims.
Thread Level: 6

Only reason market didn’t plummet again today is that it’s closed, moron.

Author: ND521 (9269 Posts - Joined: May 10, 2016)

Posted at 3:17 pm on Apr 5, 2025
View Single

(no message)

This message has been edited 2 time(s).

God may not care who wins, but His mother does
Thread Level: 7

He’s an expert.

Author: jimbasil (52343 Posts - Joined: Nov 15, 2007)

Posted at 4:21 pm on Apr 5, 2025
View Single

(no message)

Jack, he is a banker
and Jane, she is a clerk
Thread Level: 6

Nope, just the markets. Remove head from ass.

Author: Frank L (64094 Posts - Joined: Sep 20, 2007)

Posted at 1:37 pm on Apr 5, 2025
View Single

(no message)

Thread Level: 7

And they’ll go back up. That’s how it works.

Author: LanceManion (7665 Posts - Joined: Jul 16, 2010)

Posted at 1:41 pm on Apr 5, 2025
View Single

(no message)

Imposing corporate abuse, neglect and greed on deserving victims.
Thread Level: 8

So where will they be at the end of the year? Above 44K? Bwahahahahaha, you are funny. Your dude

Author: Frank L (64094 Posts - Joined: Sep 20, 2007)

Posted at 1:43 pm on Apr 5, 2025
View Single

killed the bull market golden goose.

This message has been edited 2 time(s).

Thread Level: 3

This is why US industrial base was hallowed out and working class was destroyed. We're becoming

Author: Eli (9482 Posts - Original UHND Member)

Posted at 12:45 pm on Apr 5, 2025
View Single

the richest country on paper money, not on real economy.

You should be ashamed of yourself to preach that lets sacrifice US industry, particularly manufacture for the benefits of special interest group like financial sector. The last generation of D would be rolling in their grave if they had seen what you preached.


This message has been edited 1 time(s).

Thread Level: 4

It’s better to not post and be thought an ignoramus than to post and remove all doubt

Author: Chris94 (36499 Posts - Original UHND Member)

Posted at 12:49 pm on Apr 5, 2025
View Single

(no message)

Thread Level: 5

Illogical. Impractical.

Author: Hensou (8017 Posts - Joined: Dec 21, 2022)

Posted at 1:45 pm on Apr 5, 2025
View Single

If a person doesn’t post, there would be absolutely no reason to think they are an ignoramus. They might even think the same as you. No way to prove anything.

Thread Level: 5

Boom!

Author: Frank L (64094 Posts - Joined: Sep 20, 2007)

Posted at 1:09 pm on Apr 5, 2025
View Single

(no message)

Thread Level: 5

MAGA loves to remove all doubt on the daily

Author: Death (1090 Posts - Original UHND Member)

Posted at 1:04 pm on Apr 5, 2025
View Single

(no message)

Thread Level: 6

In fairness, where he grew up there were plenty of slave labor factories.

Author: Frank L (64094 Posts - Joined: Sep 20, 2007)

Posted at 1:10 pm on Apr 5, 2025
View Single

(no message)

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