Scribd
Upload
38 views1 page

1.2.5 Miscellany: G, and X M Is Reported in Line 25 of NIPA Table 1.1.6. As A

This document discusses international trade deficits and their implications. It states that when the US runs a large trade deficit, it means non-US residents are demanding and purchasing high-priced US assets. In return for these asset sales, the US receives consumption or investment goods. So a trade deficit does not necessarily indicate future problems for US residents and could simply reflect strong foreign demand for US assets.

Uploaded by

Akash Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
38 views1 page

1.2.5 Miscellany: G, and X M Is Reported in Line 25 of NIPA Table 1.1.6. As A

This document discusses international trade deficits and their implications. It states that when the US runs a large trade deficit, it means non-US residents are demanding and purchasing high-priced US assets. In return for these asset sales, the US receives consumption or investment goods. So a trade deficit does not necessarily indicate future problems for US residents and could simply reflect strong foreign demand for US assets.

Uploaded by

Akash Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 1

bought.

This means that in return for the assets that are sold, consumption
or investment goods are received in return. In sum, when
the United States runs a big trade deficit – meaning X − M < 0 – at
the same time that its residents are enjoying a lot of consumption and
saving relatively little (as was the case in 2007), this is not necessarily
indicative of bad things to come for US residents. It could simply
mean that non-US residents are demanding US assets at relatively
high prices, and when assets are sold, something must be received in
return.22
1.2.5 Miscellany
Two other minor points to keep in mind:
• Real C, I , G, and X − M are computed in an identical fashion to
the apples–bananas example in section 1.1.1. For example, if apples
and bananas were two investment goods, then in the examples of
section 1.1.1 we would have computed real investment in apples
and bananas.
• Equation (1.7) exactly holds for nominalGDP,C, I , G, and X − M,
but for technical reasons it only approximately holds for the real
variables. The gap between real GDP and the sum of real C, I ,
G, and X − M is reported in line 25 of NIPA Table 1.1.6. As a
percentage of real GDP, this gap has been less than 5 percent in the
postwar period.
22 Trade is potentially beneficial whenever two countries have different relative
prices for two goods. In this paragraph, I’ve assumed the implied interest rate on
US assets is higher for United States residents than in the rest of the world. Since
the interest rate is the price of consumption today relative to consumption in the
future (as we show in Chapter 4), any decline in the interest rate on US assets
(that is induced by non-US residents purchasing US capital stock and increasing
the price of this capital) will be associated with an increase in current
consumption of US residents.

You might also like