Net Exports
Is it better to give than receive?
GDP is an important number. And, of the four main components, net exports of goods and services (aka trade) is the smallest contributor. Here is what that looks like:
So, what’s weird, is that if GDP is all the stuff we make, how can trade be a negative contributor? Like, how do you make negative stuff?
If I paid someone to smash my computer, that would be added positively to GDP as consumption for a service. So, even if we thought about destroying stuff, economists would just give us a wry smile, adjust their glasses and be all snarky like “well, acktuallyyy that’s not negative GDP” and then wave their PhDs in our face to show us how smart they are before running back into their ivory towers.
But, if you think about GDP and think about the name Gross Domestic Product, then it’s really easy. If we make something here and ship it to someone in another country then that is domestic production. However, if we pay for something from another country, that is not domestic production. It would count as GDP for the other country but not for us. If we pay for production produced in another country (i.e. imports) that counts against us. Make here and ship it off (i.e. exports)? We good - add it GDP!
So, we make a lot of stuff and send it to other countries and we buy a lot of stuff from other countries so there are imports and exports. Exports grow GDP and imports reduce GDP, so when we take exports less imports we get Net Exports! So, to create negative GDP, we have to import more stuff than we export. And that is what we have been doing consistently since the 1970s. We call this the trade deficit and it makes a lot of people really angry.
Surprisingly, economists, the people who love GDP and talking about it, tend to not worry so much about trade deficits. One argument is that, the American consumer is so strong that we have to import stuff from elsewhere just to satisfy that voracious appetite. We are like the cousin with bad manners taking second and third helpings at Thanksgiving before anyone else has finished what was on their plate. The only difference is instead of a meal it’s a global game of high-stakes geopolitics with real world consequences affecting the lives of billions of people. Anyways, it’s good in this case to be the big kid.
The other thing to note is that the trade deficit tends to get bigger when times are good and shrink during recessions. Economists don’t like recessions so if something is happening during a recession then they likely want the opposite to happen when it’s not a recession. So, if the trade deficit shrinks when times are bad then it should grow when times are good.
But, reality isn’t so simple as those neat little thought experiments. Trade is super complicated and people spend their lives studying it. We’ve been trading for like, a really long time as a species and we haven’t figured out some perfect theory so anyone who claims that a trade deficit is either only good or only bad is simplifying something to a fault. Kind of like everything else in life. That’s why I just look at charts and try to tell fun stories because reality is too dauntingly complicated to try to do anything more.
In the next post I’ll look at trade from another angle and write some stuff about that!
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