26 Apr 2011

Idiot Check on International Trade Accounts

Economics 10 Comments

[UPDATE in the block quote…]

I have this as a footnote in a forthcoming article. Can people please confirm its accuracy, or did I get it backwards? (And note, I don’t just mean, “Is this generally right?” I mean, is this exactly right, or did I flip it?)

[UPDATE: Edited due to comments. But it was the fault of the MMTers!!] Strictly speaking, the (X – M) term refers to a current account trade surplus (or deficit), rather than a trade current account surplus (or deficit). The two are closely related and can be used interchangeably for our simple purposes in this article. The actual difference has to do with income earned abroad from ownership of foreign assets. For example, suppose Americans owned $100 million worth of corporate stock in a tiny island called Bananistan, and that this stock paid $5 million in dividends every year. The Americans could take that income and use it to import $5 million worth of bananas. If the residents of Bananistan didn’t buy any goods or services from Americans, then the U.S. would have an annual $5 million trade deficit (in goods and services) with the country of Bananistan. However, the current account deficit would be zero, because the annual shipment of $5 million worth of bananas would simply maintain the financial position of the residents of the two countries with respect to each other.

10 Responses to “Idiot Check on International Trade Accounts”

  1. jjoxman says:

    Are you lumping together capital and current account in your article? If not, you should rephrase this because you are talking about the overall balance of payment, not just the current account balance.

    • jjoxman says:

      D’oh! That’s what I get for reading too fast.

      Yes, this is right. But (shockingly) I agree with DK about clarity.

  2. Daniel Kuehn says:

    I think X-M can refer to the current account in some cases and the trade balance in others (depending on whether you’re talking about GDP or GNP), and usually they are quite close.

    I think it’s fine, although I might note the GNP and GDP distinction to be clear, since X-M is typically understood to be the trade balance.

    More importantly – should “Bananistan” be “Bananastan”? The Google says yes.

    • bobmurphy says:

      Right DK–that’s what I determined myself after I posted this. As in all matters, I was misled by the #)$%#)$ MMTers.

      All joking aside, DK, if you go check that link, you’ll see Mitchell (?) is talking about GDP, and then he says (X-M) is the current account balance. In my discussion of it, I called (X-M) “trade surplus” and clarified in the footnote the difference.

      So do you agree with me DK that actually if we’re calling it GDP, then (X-M) is the trade surplus (deficit)? And I should note in the footnote that Mitchell is a little bit off, then launch into my Bananistan example?

      And I prefer Bananistan because it’s like Kurdistan.

      • Daniel Kuehn says:

        I think that’s right at least.

        Practically speaking, I think there may be no difference. Looks like Mitchell calls it “net exports” one place and “current account balance” in another place, so he seems to be the sloppy one. The sloppiness probably doesn’t have any practical significance, of course – but if you’re going to get into the weeds you might as well do it right!

        Ironically, though, he’s Australian and I believe Australia is supposed to be one of the few places where the trade balance and the current account balance do substantially diverge (I don’t know if it’s mining FDI or what that drives that). You’d think of all people he would be more careful about the distinction.

        • Jon O. says:

          Isn’t FDI part of the capital account though? Unless you’re saying its the income outflow from previous mining FDI? That would probably have a large effect on the current acount.

          • bobmurphy says:

            I can’t speak for DK, but in general yes, the current account reflects income earned that period from previous investment.

  3. Daniel Kuehn says:

    Granted, I’m on Soros’s payroll – but Greg Mankiw should be fairly reliable: http://gregmankiw.blogspot.com/2006/07/current-acccount-vs-trade-deficit.html

  4. Daniel Kuehn says:

    I think that update is fine with no need to mention GNP/GDP – since nobody talks about GDP anymore.

    Anyone that will confuse it is clearly knowledgeable enough to know there are two metrics, otherwise they would have no reason to confuse it.