Is the trade gap narrowing a good thing?

[Kdillard]

I see that stocks are rising and they say it is because of that.

[Kurt_and_Hunter]

1. Good for GDP in technical terms, but not always a good thing

We are a net importer so if our economic activity decreases the trade gap goes down. That's what helped prop up GDP in ironic fashion during our slide--when Americans stopped buying things last winter that improved the trade gap.

If the market is excited about something today, however, I would guess it's a narrowing due in part to increased US export activity. The dollar has declined this year so that would make sense. And more exports is a good thing.

(Weak dollar=US products cheaper to other countries)

[Kdillard]

3. Thanks for that explanation. The underlying reason determines whether this is good

or bad as I figured.

[DrToast]

6. Correction needed here

We are a net importer so if our economic activity decreases the trade gap goes down. That's what helped prop up GDP in ironic fashion during our slide--when Americans stopped buying things last winter that improved the trade gap.

Net exports can't prop up GDP because reduced imports will show up in reduced consumption. If the trade gap didn't improve last winter due to reduced imports, then consumption would have been higher and GDP would have been the same.


Net exports and consumption are not independent variables in the GDP equation.

[Kurt_and_Hunter]

8. No correction needed.

I have a hard enough defending what I say to start defending things I didn't say.

GDP last winter enjoyed some paradoxical support because all economic activity cratered, globally. Other countries were hit at the same time so our exports went down while our domestic consumption of imported goods also went down. Since we run a big trade deficit an across the board reduction in economic activity reduced the usual drag that deficit places on GDP. I have seen it is estimated that were it not for that odd accounting bonus we would have hit about -7.5% in Q4-2008.


Net importer = exports more than import

Our Trade deficit = imports - exports

Cut all economic activity in half and trade gap goes down by half.

20 - 10 = 10

10 - 5 = 5

Were we a net exporter than cutting all economic activity would decrease our trade surplus.

"when Americans stopped buying things" = less imports. (Since most of what we buy is imported)

[DrToast]

11. Now explain how that "props up" GDP, which you claimed

And is what I disputed.

If I claim X, don't argue Y and try to pretend you proved me wrong.

[Kurt_and_Hunter]

12. All other things being equal lower trade deficit = higher GDP

The oddity of the less-negative trade gap effect on GDP last winter was widely discussed by real people - it's not something I made up.

[DrToast]

14. Once again, trade does not exist in a vacuum

It is a result of other economic activity.

If the trade deficit is shrinking because imports are collapsing, that means the other elements of GDP are being crushed.

Thus, you can't say net exports is propping up GDP in such a situation because it is a byproduct of the other elements of GDP falling apart. It is an effect, not a cause.

Imagine you have two glasses: glass #1 is full and glass #2 is empty. Now assume you take glass #1 and pour some of its water into glass #2. If you only look at glass #2, you'd say, "Boy, this glass sure has helped in my water accumulation goal this month."

But that would be completely false, because you're taking water from the first glass to improve the situation in the second glass. You have to look at both glasses before you judge how you did this month.

Here's a good explanation from Donald Marron: http://dmarron.com/2009/07/31/broad-weakness-in-q2-gdp/

[Jeff In Milwaukee]

2. It depends on why...

If the trade gap is narrowing because Americans are purchasing fewer items made abroad, that could be good news for American manufacturers. But it could also be bad news because those items (like consumer electronics) are manufactured almost exclusively overseas, and so the reduction in sales could be part of an overall downturn in consumer spending.

I'm pretty sure that the trade gap also includes the cost of imported oil. Price of oil is down = Good News. Consumption of oil is down = Bad News (i.e., fewer factories are operating and, thus, consuming less energy).

And it's really even more complex than that.

[Kdillard]

4. Thank you for that explanation. It makes sense.

[Zynx]

5. In this particular case, its nearly an unmitigated good item.

Exports were up close to 3% and imports ex-petroleum were up a decent amount. The qualifications on interpretations of trade data have already been listed here so I won't bother repeating.

[AllentownJake]

7. Is it?

It was up 18% in the last report.

[Kdillard]

9. Apparently at least that is what I have been reading online.

[AllentownJake]

10. Gotta link

My normal business sites have nothing on it.

[Kdillard]

13. Link fixed

http://online.wsj.com/article/SB126045167179285411.html?mod=WSJ_hps_LEFTWhatsNews



The U.S. trade deficit narrowed unexpectedly in October, falling to $32.94 billion as the rise in exports from September of goods such as cars was slightly higher than the increase in imports.

The figure, representing the U.S. deficit in international trade of goods and services, is 7.6% lower than the downwardly revised $35.65 billion trade gap the U.S. ran in September, the Commerce Department reported Thursday.

Separately, the number of U.S. workers filing new claims for jobless benefits rose more than economists expected last week, the Labor Department said in its weekly report Thursday. Total claims lasting more than one ...