From: thf2@ellis.uchicago.edu (Ted Frank)
Subject: Re: Budget deficit and trade deficit 
Reply-To: thf2@midway.uchicago.edu
Organization: University of Chicago
Date: Fri, 22 Jan 1993 22:23:34 GMT

In article <1993Jan22.194909.24788@gordian.com> mike@gordian.com (Michael A. Thomas) writes:
>In article <1993Jan21.231513.8855@midway.uchicago.edu>, thf2@ellis.uchicago.edu (Ted Frank) writes:
>> Trade deficit = Exports minus Imports.  Note that domestic consumption of
>>  domestic goods has nothing to do with the trade deficit.
>
>  Yes.
>
>> Exports are exogenously determined -- the budget deficit has little to
>>  do with this.
>
>  Yes.
>
>> Imports are in a direct relationship with national income -- the more income
>>  there is, the more imports people buy.  This should not be surprising --
>>  the more income people have the more they consume, both of domestic and
>>  foreign goods.
>
>  Stop right there. Why does this correlate? If foreign goods are of
>a superior quality/price ratio people will buy them in larger numbers.

True.  Doesn't change the analysis, though.  Quality is exogenous.

>This phenomenon is completely independant of budget deficits. Also, a 
>growing national income in itself would explain why the absolute number
>of dollars shipped out of country is larger. 

If a country is going to purchase 40% of its cars from foreign markets,
if it has more money to buy cars, it's going to spend more money on
foreign cars.

>  I'm also dubious about the inviolate nature of this "direct relationship"
>between national income and imports. Care to take a stab at some hand 
>waving mathematical formula describing this relationship? 

The more income the more consumption.  The more consumption, the more
any individual good gets consumed.  Imports are individual goods.  Hence,
more imports get consumed.  Nowhere do I say that the ratio of imports
to domestic changes.  It might, but one doesn't need to assume that.
If people are buying more, they're buying more imports, just like they're
buying more cheese, more VCRs, more cars, more... 

>  As a note, in order to make any sense of a trade imbalance, the
>dollar amounts must be taken as *relative* measures of that imbalance.
>Devaluating the dollar by a factor of ten, say, would not in itself
>make the trade imbalance any better or worse. Thus if you are basing
>your argument around the actual dollar amounts, your analysis is
>flawed whether or not the deficit is an issue. 

I'm basing the argument based on actual consumption.

>> Income is increased by lower taxes and increased government spending, i.e.,
>>  deficit spending.
>
>  And higher interest rates because of financing the debt. This has a
>real downward pressure on the valuation of the dollar against, say, the
>Yen. This in turn makes foreign goods much more expensive (given exchange
>rates). Why didn't this have a stifling effect on imports?  This line of
>reasoning is dubious at best. 

Actually, higher interest rates makes more people want dollars (to invest
in the higher interest rates) which strengthens the dollar, which makes
imports cheaper.  So, yeah, that's another way that the budget deficit
affects the trade deficit.
-- 
ted frank                     | thf2@ellis.uchicago.edu 
standard disclaimers          | void where prohibited
the university of chicago law school, chicago, illinois 60637
Newsgroups: talk.politics.misc