Yesterday in class we talked about the current account and the capital account and how they cancel each other out to make a balance of payments. We were given the example that if the world is made up of two countries (e.g. China and the U.S.) one country's exports must be imported by the other country. This means that on a world scale there should always be a balance of payments. Even with more countries in the world all of the exports should be canceled by imports by other countries. This is pretty simple logic since it would make sense that a country would only export goods if someone was to import them.
In a recent Economist article, economists discuss how there was a net trade deficit of 331 billion dollars for the world in 2010. This trade deficit is expected to reach over 700 billion by 2014 which is pretty outrageous given the idea that countries are supposed to even out trade deficits and surpluses. The reason given for this discrepancy is essentially just statistical errors. These are pretty big errors to be making in a world where people are so worried about the state of the economy. This is an important thing to fix because our trade and economic policies depend on what we believe to be the state of the economy. If we are making such big errors when it comes to trade it is possible that we will make policies that do not accurately target real issues in the economy.
Well, it looks like numbers are simply being misreported. This seems pretty natural as you're bound to run into some error whenever you try to compute world-wide numbers. I find it interesting that the number switched from a surplus to a deficit in recent years though. Perhaps there is some deeper reason for this.
ReplyDeleteThis article is also really interesting:
ReplyDeletehttp://www.hks.harvard.edu/var/ezp_site/storage/fckeditor/file/pdfs/centers-programs/centers/cid/publications/faculty/wp/124.pdf
It talks about how the U.S. manages to run a current account deficit year after year, but we always seem to make money at the end of the day (obviously, or else the system obviously would have collapsed.) But basically the authors posit that the U.S.'s investments abroad are more profitable than foreign investments made in the U.S. The authors call this imbalance "dark matter". They say that the dark matter is the knowledge and know how that U.S. investors bring abroad which makes their investments more profitable.
Pretty interesting stuff.
I think Chris hit on a key point here which is that numbers are being misreported. What is often times so frustrating is fact checking an ambiguous statement that a politician makes relating to the economy. Numbers are often times misreported by different sources for political purposes. Relating to the trade net deficit, whether it is an unintentional statistical error or a calculated misrepresentation of the numbers, it needs to be fixed to restore confidence in the markets.
ReplyDeleteThis comment has been removed by the author.
ReplyDelete"Close enough for government work"...
ReplyDeleteThat's why government should be small. There is no bottom line so it is very hard to measure productivity and effectiveness. People make mistakes and don't get fired. Honestly, I don't have much faith in governments to get the job done. It's all about who you know, not what you know and what you control not what you get done or can do. This sounds like par for the course.