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Balance of trade ain’t the same thing as balance of payments:
I too often read internet posts contending USA’s chronic annual trade deficits are not detrimental to our economy because those dollars spent for imports “must eventually return home”. These posters are mistakenly confusing USA’s annual global balances of trade with our annual global balances of payments; they are not the same thing.
Regardless of a nation’s annual balances of trade, their annual balances of payments must always be zero.
If the nation enjoys a trade surplus, the consequences due to that surplus will certainly increase the nation’s GDP more than otherwise and unless that nation already enjoyed “full employment” it will increase their numbers of jobs more than otherwise. Additionally, to some extent it will increase the value of their currency and thus increase the purchasing power of their median wage, and/or reduce their government’s debts, and/or promote increased investment, particularly government investment within their nation.
[The term ‘investment” is meant in the true economic sense of wealth indirectly or resources directly employed to improve or increase production of goods or services. Transfers of wealth with no effort or sacrifice for improving or increasing production of goods or services are not “investments”].
The consequences of a nation’s annual trade deficit’s the reverse of a trade surplus’s consequences.
Those believing that increase of a nation’s prices with no similar or greater increasing of their gross domestic production is not detrimental to the nation’s economy, can justify their belief that annual trade deficits are not detrimental to their nation’s economy.
The basics of the balance of payments accounts are that they are a double-entry system -- above-the-line (current) transactions are financed by offsetting below-the-line (capital) transactions. As a whole therefore, the accounts always add to zero, with the "Errors & Omissions" line waiting to sop up any noise to the contrary. There are various balances within the accounts however that are discussed with some frequency. The balance on goods and services is one, and the balance on current account is another. Each balance draws a slightly different picture and tells a slightly different story, but none of them contradicts the simple and independent fact that as nothing but a claim on the US economy, a dollar that has entered the international realm can only seek to come home again.
The basics of the balance of payments accounts are that they are a double-entry system -- above-the-line (current) transactions are financed by offsetting below-the-line (capital) transactions. As a whole therefore, the accounts always add to zero, with the "Errors & Omissions" line waiting to sop up any noise to the contrary. There are various balances within the accounts however that are discussed with some frequency. The balance on goods and services is one, and the balance on current account is another. Each balance draws a slightly different picture and tells a slightly different story, but none of them contradicts the simple and independent fact that as nothing but a claim on the US economy, a dollar that has entered the international realm can only seek to come home again.
Pub-911, I’m not responding to the contention that dollars spent for imports “must eventually return home” but USA import purchasers could not re-spend their same dollars to purchase domestic products.
How those dollars “return home” matters.
If the dollar’s return as payments for USA exports, they positively increase USA’s balance of trade and does not refute the fact that annual trade deficits are ALWAYS net detrimental to their nation’s economy).
If the dollars were returned as direct investment into enterprises to increase their purchases of goods and services, I agree that’s true investment that increases USA’s GDP and numbers of jobs.
Simple transfers of wealth or accumulation of wealth does not in itself increase USA’s GDP or numbers of jobs.
Your initial venture into balance of payments concepts was more problematic than insightful. And those net dollars floated out into the international economy come home as purchases of US corporate stocks and bonds, real estate, and government debt, particularly US Treasury securities, a favorite of investors here and all around the globe.
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