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Trade Deficit Increases. . . or Does It?

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Unread 03.16.12, 01:03 PM
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Trade Deficit Increases. . . or Does It?

On 03.16.12 10:30 AM posted by Bryan Riley

The U.S. Bureau of Economic Analysis (BEA) just announced that the country’s current account deficit for 2011 was $473.4 billion. This number includes transactions like exports and imports. Cue the “sky is falling” headlines.

However, the BEA did not point out that the overall U.S. international transactions deficit was $0. That means the number of dollars leaving the country and the number of dollars entering the country in 2011 balance out. Clearly explaining this information might reduce the number of inaccurate reports on the trade deficit’s impact, such the Associated Press story stating that “A higher trade deficit acts as a drag on growth.”

A total accounting of U.S. international transactions, including the $784 billion in foreign investment in the United States, shows $3.7 trillion leaving the United States in 2011 and $3.7 trillion entering the United States in 2011. The real story for reporters is that in 2011, as in every other year, the United States did not have a deficit in its international economic transactions.

Exports and imports are only part of the story. Reporting a “trade deficit” because we import more than we export sounds scary, which is why it’s important to account for things like foreign investment in the U.S. economy. When this complete accounting is provided, people can see that U.S. transactions balance out, and policymakers can avoid making poor policy choices based on an incomplete picture of U.S. financial flows.

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