August 27 2010

More Economics 101

Hadley Heath

I recently explained how the government can sometimes collect more tax revenues at a lower tax rate.  Although this might at first sound counterintuitive, it makes sense once all the factors are considered. 

Another economics lesson that might merit further explanation is the impact that imports have on GDP.  Today's the Washington Post headlines a story, "Economic Growth Slowed by Trade Gap."

It's true that the most recent reports indicate that, yes, growth is slowing, and yes, the trade gap is widening.  But it's important to realize that not all the goods imported to the United States are consumer goods.  Sure, some Americans might enjoy French perfumes or Belgian chocolates, but more than half of imports to the United States are capital goods for producers - who use those goods, like machinery or raw materials, to create and distribute consumer goods here at home.  This type of import to the U.S. is good, because it should make us more productive.  To see U.S. imports by their end use, check out this table from U.S. Census Bureau. 

So before we get bent out of shape about the trade gap and start blaming it for our slowed growth, we should step back and examine all the variables at work.  The focus of our efforts toward economic growth should be on keeping resources in the private sector, not blaming the trade deficit.

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