RebelCapitalist: Financial Information for the Rest of Us

Plug the Leak

Jan 12, 2010 | By: Mr_Blue | Tags: china, imports, trade deficit, exports

Gross Domestic Product (GDP) is our main measuring stick to determine economic growth. The calculation of GDP shows why imports can be drag on economic growth particularly since consumer spending (a 70% factor of GDP) is in the tank. Today, the Census Bureau announced that our trade deficit (difference between exports and imports of goods and services) grew in November 2009 to $36.4 billion. Not good news.

The calculation:

GDP = Consumer Spending + Gross Investment + Government Spending + Net Exports

Net Exports = Exports - Imports

Focus on net exports - exports minus imports. Since we are running a TRADE DEFICIT then we are importing more goods and services then we are exporting to the world. Again, not a good thing for economic growth as calculated by GDP. This TRADE DEFICIT provides a drag economic growth or a leak of economic activity.

Why a drag or leak? Well, if we are buying imported goods that means that money to purchase that product ultimately goes to the country that imported that good. That money doesn’t stay here in the U.S - within our economy. This economic activity essentially ‘leaks out’.

There was a time when our Trade Deficit was not so large and even zero or a Trade Surplus - imagine that:

But that certainly has not been the case in recent history as shown by the above graph. This is a problem particularly when other factors, such as consumer spending and investment, may not return to past glory. BTW, we are running a $20.2 billion Trade Deficit (Goods only) with China.

Bottomline: our engagement in globalization and trade needs to be re-examined if we are to see a sustainable level of economic growth. Gone are the days where unfettered globalization and trade. We need to re-examine our trading relationship with China.

Souce: Census Bureau [pdf file]