In the current US political discourse, it is common to hear that the US economy is smaller because of the US’s trade deficit or tariffs to reduce income equally. Such arguments are usually not well known. But here, I would like to point out one of the claims about this claim that reflects more fundamental misunderstandings.
Introduction Economic Text There are several ways to measure the economy, and one of the standard approaches is:
GDP = C + I + G + X -M.
This “National Income Accounting Identity” is based on the idea that this “national income accounting identity”, sometimes called, can be used in some main ways. The last two terms cover international trade. Some of the national economic production can be exported to other countries, but you need to consider income elsewhere.
This equation is not a “theory” of how the economy works. Instead, “identity” is a statement that is true by the definition of terms. This is one of the ways the GDP is defined. When you go to the economic analysis soup website Look at the press release on the recent estimates of GDP. These are the estimated category.
The problem occurs when you think that someone can move the number to take an accounting identity and achieve the goal. Maurice ObstFeld explains the issue of “problem for trade policies with bad identity.” (Peterson Institute for International Economics 24-13, October 2024). He writes:
National income and product (NIP) identity is often the basis of the trade deficit that excess imports of imports to export imports reduce economic growth and job losses. Identity reflects that the total production of the country (total production or GDP) of the country must be consumed by households, investments in business, or to be exported by the government.
GDP = Consumption + Investment + Government Purchase + Pure Export.
The last period on the right is net export (import expenditure without export receipt) and trade balance. Since some parts of national consumption, investment and government purchases are imported from abroad, they must be deducted from the other right for a true expression of how to assign identity as possible by adding these components (additional income). Previous relationships are identity because all products in the GDP sold in the market are purchased for some purposes.
The claim that trade defects (net export levels) are immediately followed by the superficial application of NIP identity. It is assumed that the trade deficit increases due to the fall of net exports, but nothing changes on the right. The identity then means that the GDP should be as low as the same amount. This opens up a false reasoning that a larger trade deficit must draw out production and employment.
Perhaps the core phrase in the explanation is that “there is nothing else about the change on the right.” To see more specifically, say that the income is falling (set separately in the moment why They fell.) 100%of the decrease in imports is said to increase in GDP by consistent with the domestic production increase. However, “there is nothing else about the right change” -Dispers, even if domestic production increases, there is no increase in private or government consumption or investment or export. ObstFeld speaks in the following way.
However, the prediction that is implicitly based on the calculation is that the income is automatically redirected as a domestic product (e.g.) to some extent (e.g., to some extent), and the total consumption of total consumption and investment spending does not change. [national income and product] They argue that net exports to the right will rise without changes in the other right quantity, and that the GDP will be higher in the amount of trade balance improvement.
The defect in this claim is that changes are hardly changed without consumption, investment or government spending. The way trade balance interacts with other economic activities is critical. why It is changing.
Pay attention to the rhetorical changes that often occur here. We started with the statistical definition of GDP. It is always true because GDP is definition. It is true that if the income falls, the other thing is to change to preserve the status in the definition of the GDP. However, the statement that change will occur entirely in the form of greater domestic production is a concrete theory of change, and it is not clear that the theory is right. Some alternative theories on the impact of import tariffs are as follows.
If the US imposes tariffs on imported products, US income will decrease. But in other countries, US exports will also decrease because it will retaliate with tariffs on US exports. If these two effects are exactly offset by each other, if the US imports and low US exports are the same, the trade deficit will not change and the GDP does not change. Instead, while the export -oriented industry is blowing in the US economy, there is a charter and re -assignment to the US economy, where US production in the US market increases.
Or the US imposes a tariff on imported products so that the US income decreases. This means that foreign producers who have sold to the US market are earning less US dollars. In the foreign exchange market, US dollar supply decreases and the US dollar exchange rate is rising. As a result, US exports are more expensive in the world mark and reduce exports.
Or the US imposes a tariff on imported products so that the US income decreases. Many of the imports are used as an opinion on production by US companies. The reason why a US company imports this input is because it is cheaper or quality (or both) than the same product if the same product is produced on the US border (actually produced at all). Therefore, all US companies that depend on import input (including multinational and most successful US multinational companies) are rising costs. As a result, they can decide to reduce the level of investment.
Or the US imposes a tariff on imported products so that the US income decreases. Many of these imports are purchased by consumers, which are cheaper than the same product (when the product is actually produced at the US border), which is cheaper, or high in quality, or high quality. Therefore, when these consumers face the need to purchase alternative products, they will buy what they prefer by higher price or quality differences. As a result, consumers can decide to reduce.
I would like to emphasize two points here.
One is that all of these possibilities are consistent with the default definition of GDP. The default definition of GDP does not tell which of these results are likely. It tells you how GDP is calculated. The definition of GDP does not say that if the tariff is imposed on the import, the GDP will rise, fall or maintain the same. Definition does not indicate whether changes in tariffs affect export, consumption or investment. It is not just a theory of how the economy will react. Anyone who starts with the statistical definition of GDP and then claims to have a low income certainly It is rapidly produced by leading to the equal domestic production. In the phrase in Obstfeld, they assume that “the other on the right does not change.” It is the whale of the family.
Another point is that you need to look at the evidence to distinguish the possible theories. ObstFeld explains in detail about the theory of import restrictions and the possibility of any theory. For example, the “theory”, which responds to tariffs by retaliation, is taking place in real time. The “theory”, which has a tariff on imports, has led to a stronger exchange rate and reduced export sales. Company and furniture have difficulty when access to imports that they prefer to buy is restricted.
There are many other arguments of import tariffs. I have discussed some of them in the past and will discuss more. However, the claim that import tariffs will increase total domestic production based on the definition of GDP and national income and product identity, we must create age, and mock and laugh anywhere.
