Trade in the national accounts

I though a little different perspective on the impact of trade on the real GDP accounts might be interesting.

The first chart is of imports market share, or imports as a share of what we purchase in the US. In the second quarter of this year imports market share rebounded to about where it was at the pre-recession peak, or about 16% of consumption. Since the early 1980′s when the US started borrowing abroad to finance its two structural deficits — federal and foreign–
trades share of consumption has risen from about 6% to some 16%. Normally this has a small negative impact on the US economy, but sometimes you get quarters like the last quarter. Last quarter real domestic consumption rose at a 4.9% annual rate. That was an increase of $162.6 billion( 2005 $). But real imports also increased $142.2 billion (2005 $).
That mean that the increase in imports was 87.5% of the increase in domestic demand.
To apply a little old fashion Keynesian analysis or terminology, the leakage abroad of the demand growth was 87.5%. It does not take some great new “freshwater” theory to explain why the stimulus is not working as expected, simple old fashioned Keynesian models explain it adequately.


So compare this with exports. Import were 16% of domestic demand, but in sharp contrast
exports were only equal to 3.2% of final sales of domestic production. The peak share for exports was 5.9% in the 4th quarter of 2004. The great recession generated the severe world wide downturn in trade, but US imports are obviously rebounding much more than US exports. If you break down the difference between the US economy and the German economy, that so many people are trying to make so much of, this is the difference — Germany exported and the US imported. The difference has little or nothing to do with the difference in US and German economic policy in the Great Recession. Rather it reflects the structural changes that have stemmed from the structural twin deficits in the US since 1980.
It is just another example of how the “starve the beast” strategy does not hurt government.
Rather, it does massive damage to the private economy. The advocates of starve the beast expect a major crises to lead to a reduction in the role of government. But what they do not say, is that the crises they are so eagerly looking forward to is a collapse of the private economy. They consider this a good trade-off.


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