Wednesday, January 13, 2010

Understanding the Trade Deficit 101

Often when reasonable free traders explain the strong, positive correlation between the US trade deficit and economic growth, an ill-intentioned or partially-informed skeptic will complain that the free traders' analysis must be wrong because the official calculation of GDP subtracts imports, and thus the trade deficit (i.e., more imports than exports) must be a "drag on economic growth."  This response is, as expected, completely wrong, but it's rare that we see a detailed explanation of why.  Fortunately for us, Cato's Dan Ikenson puts on his economist/accountant hat today and provides this full explanation in what must be one of the nerdiest blog posts in the history of the interwebs.

WARNING: Ikenson's analysis is really, really boring, so grab a cup of coffee before tackling it.  But because the trade deficit is perhaps the least understood and most demagogued of all trade issues, this information also really, really valuable.  So thanks, Dan.

You big geek.

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