Arnold Kling  

Trade Deficit a Concern?

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Productivity and Labor Utiliza... Co-operation Hormone?...

To what extent is the large trade deficit reported for the U.S. a cause for concern? In my Bubbleheads essay a couple months back, I discussed some of the fears about the deficit and the apparently-overvalued dollar.

Brad DeLong wonders how much we should really worry about the trade deficit.


So there you have it. Some of America's trade deficit is not really there--the result of errors and omissions in the data, a "statistical discrepancy." Some of America's trade deficit is there, but is not "unsustainable": the portion of America's trade deficit that is the result of its three "exorbitant privileges" can continue until the age of the world changes: American can keep selling international reserve and liquidity services, political risk insurance services, and future immigration options to the central banks and rich of the rest of the world for a long time to come.

For Discussion. One challenge is to measure the extent to which the value of the dollar--and hence the trade deficit--reflect political risk insurance. Could event studies of the behavior of the dollar in response to incidents in the war on terrorism help sort this out?



COMMENTS (4 to date)
Matt Young writes:

Houses in my neighborhood sell to overseas Chinese. Chinese organize buying strategies in large meetings with neighborhood maps and Chinese real estate agents. My neighborhood is in Northern California.

Mainland Chinese officials use their pile of American securities as an insurance policy against massive unemployment. They subsidies economic expansion rather then pay out welfare.

As a result, I am helping shut down businesses in California so these businesses will not harras me with employment offers. I will sell my house, and retire early elsewhere with my toys made in China.

Chinese aren't worried about terrorism, the odds are so low that it is not a concern.

Eric Krieg writes:

When you read stories that the Yuan is "overvalued by 40%", or whatever, how is that "overvalue" determined?

Is it that Chinese goods are 40% cheaper than American substitutes?

Eric Krieg writes:

Slightly related article?

http://www.nationalreview.com/nrof_bartlett/bartlett081803.asp

Ted Harlan writes:

Eric,

I think most of those estimates are using PPP, or purchasing power parity. If a 1 dollar = 1 phoozit, and a Big Mac costs $2 in the US, a Big Mac ought to cost 2 phoozits. But in Phoozitstan, the Big Mac costs one phoozit. Now, while the central bank of Phoozitstan is pegging the dollar to the phoozit, you and I can compare the cost, and realize that a phoozit is really, in practice, worth two dollars.

Investors will usually play this arbitrage, but probably can't where China is concerned.

This articls is tangential: http://www.nytimes.com/financialtimes/business/FT1059479072847.html

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