The Truth About the U.S. Trade Deficit
Published in American.com on January 31, 2007
Associate Professor of Economics, Brandeis University
Chair, Department of Economics and Rosen Family Professor of International Finance, Brandeis University
Beyond myth and emotion, IBS Professors Chad P. Bown and Rachel McCulloch present some basic facts about the U.S. trade deficit.
1. What exactly is the trade deficit?
The U.S. trade deficit we read about most often is only one of several different trade balances reported in official statistics. It's the merchandise trade deficit, which is actually the narrowest overall measure of America's transactions with other countries. Thus, it can't tell the whole story of our trade position with the rest of the world. The merchandise trade balance, also called the bal-ance on goods trade, is the difference between the total dollar value of U.S. exports of tangible goods (like wheat and turbines) and the total dollar value of U.S. imports of tangi-ble goods (like t-shirts and auto parts) over a specific month, quarter, or year. When imports of tangibles are greater than exports of tangibles, then the trade balance is negative, and there's a deficit.
2. Aren't tangible goods significant?
Sure, but tangibles have become much less impor-tant over time, while services have become more important. Today, only about one-fourth of the U.S. workforce is employed in the production of tangible goods; the rest work in diverse service sectors such as banking, healthcare, education, consulting, insurance, and information technology. The link between the U.S. merchandise trade balance and the nation's overall economic con-dition is, therefore, a weak one, and getting weaker. Increasingly, analysts use a broader measure that includes services as well as tangible goods. Unfortunately, measuring the value of traded services is less straightforward than measuring the value of tangible goods (which simply get counted as they move out of, or into, the country), so some trans-actions on both sides are likely to be undervalued or even omitted entirely.
Read the rest of this article at http://www.american.com/archive/2007/january-february-magazine-contents/0116-question-answer-trade-deficit/.
Rachel McCulloch is the Chair, Department of Economics and Rosen Family Professor of International Finance, Brandeis University.