From: depken@rigel.econ.uga.edu (Craig Depken)
Subject: Re: Budget deficit and trade deficit 
Organization: University of Georgia Economics Department
Date: Fri, 22 Jan 1993 18:09:13 GMT

In article <1993Jan21.231513.8855@midway.uchicago.edu> thf2@midway.uchicago.edu writes:
>In article <1993Jan21.210053.25356@gordian.com> mike@gordian.com (Michael A. Thomas) writes:
>>In article <1993Jan19.183506.29341@midway.uchicago.edu>, thf2@ellis.uchicago.edu (Ted Frank) writes:
>>> Which link of that chain do you find implausible?
>>
>>  The leap between "Raising standards" and "Increased imports".
>>This entire line of reasoning conveniently ignores the fact that
>>people would be buying higher quality foreign goods irrespective
>>of the national debt. 
>
>I disagree with you that my analysis ignores this issue.  See below.
>
>>Your reasoning does not show that there is
>>any particular linkage between ballooning the national debt and
>>an added propensity of buying foreign goods. (Cum hoc ergo propter hoc?)
>
>Okay, here it goes again:
>
>Trade deficit = Exports minus Imports.  Note that domestic consumption of
> domestic goods has nothing to do with the trade deficit.
>Exports are exogenously determined -- the budget deficit has little to
> do with this.

This is a niave approach to the idea of international trade and why we
have international trade in the first place. The fact is that the 
deficit (in and of itself) does not play into the equation of the trade
deficit, but if exports, i.e. import demand of foreign countries, is
a function of disposable income of the foreign country, then it is 
important how the deficit is being financed. As mentioned in a post
by me earlier, if the foreign countries are using disposable income
to purchase our bonds to finance our deficit (debt) spending, then
the government is "crowding-out" potential import demand of the
foreign country.

We have trade because relative prices differ across national boundries
(see World Trade and Payments, by Frankel, Caves and Jones), and the
fact that the foreign country has goods, or another means of exchange 
(commonly called money), with which to trade. If the disposable income
of the foreign country is spent on our U.S. bonds, instead of our
exportable goods, then the fact that we import just as much, but they
import less (because they don't have the money to do so), could lead
to a higher trade deficit.

In a simple mathematical format,

	Import Deficit = Exports - Imports

 ==>    Z(Y,Y*,p)      = E(Y,Y*,p) - M(Y,Y*,p)

 Where: Y = U.S. national income
	Y*= Foreign national income
	p = world prices (vector form)

 We see that if you decrease Y*, Exports and Imports can both drop, but
the question is how much for each. Since, imports of our goods in other
countries is directly related to foreign disposable income, the trade
deficit is raised when foreign disposable income drops.

As mentioned before, the government's financing of deficit spending
through foreign purchase of our gov't bonds (i.e. Japan, Germany,
etc.), takes disposable income away from agents in the foreign
economy, and thus can increase our trade deficit.
f

>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.
>Income is increased by lower taxes and increased government spending, i.e.,
> deficit spending.
>
>Hence, deficit --> income --> consumption --> imports --> trade deficit.
>
>Okay, which part of that chain do you disagree with?

It is also rather niave to think that just because the gov't spends money
that incomes are rising. This is true, only if the gov't spends money in
efficient manners. This is a normative (i.e. philosophical) question. Our 
government gives much money to other countries, which if your reasoning
is correct, would also lead to a lowering of the trade deficit because
the foreign recipients of our grants should buy more imports, i.e. more
of our goods. 

The problem comes in how you measure income, i.e. disposable, total, real,
nominal, etc. etc. 


Craig Depken
U.Ga. Economics
depken@rigel.econ.uga.edu

Newsgroups: talk.politics.misc