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Refuting the Trade Deficit Rationale

Author

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  • W. Raymond Mills

    (Emertius Associate Professor of City & Regional Planning, The Ohio State University)

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.

Suggested Citation

  • W. Raymond Mills, 2004. "Refuting the Trade Deficit Rationale," International Trade 0407012, EconWPA.
  • Handle: RePEc:wpa:wuwpit:0407012 Note: Type of Document - doc; pages: 12 . A polemic
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    References listed on IDEAS

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    More about this item

    Keywords

    Savings; Trade Deficit; Pre-trade economy; Closed System; Capital Account; Current Account; Financial Flows;

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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