Refuting the Trade Deficit Rationale

W. Raymond Mills ()

International Trade from EconWPA

Abstract: This article provides a defense of a sentence lifted from the Final Report of the United States Trade Deficit Review Commission. 'The savings shortfall argument falsely presumes that causation goes from savings to the trade deficit'. The savings shortfall argument is support by nothing more than reasoning by analogy from the pre-trade closed economy. The equation Savings equal Investment plus the Trade Deficit cannot be reasonably interprepted as a closed system. Factors outside this equation control the level of both investment and the trade deficit. I support my position by reviewiing in detail the way the Capital Account is calculated, to show that the Current Account Balance controls the level of the Capital Account. I also review the role of the stock market in transferring wealth from the business sector to the personal sector, effectively making irrelevant the low level of savings as reported by the National Income and Product Accounts.

Keywords: Savings; Trade Deficit; Pre-trade economy; Closed System; Capital Account; Current Account; Financial Flows (search for similar items in EconPapers)
JEL-codes: F1 F2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: Written 2004-07-26
Note: Type of Document - doc; pages: 12 . A polemic

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