Understanding Economics, Trade Gaps and Deficits
Yesterday it was announced that the U.S. trade deficit had fallen to $56.5 Billion. Many readers are familiar with this topic but for newer investors this is very important to understand. What does that actually mean and do these deficits and gaps play a key role in our economy?
To better to explain I asked one of my colleagues to elaborate for us on the article yesterday on Yahoo Finance:
A “trade gap” is the difference between how much we export to a specific country and how much they export to us (an import). In that article, it was stated that the U.S. has a trade gap with Canada which rose by 3.2 percent to $7.8 billion. This means that we are exporting more than we are importing.
On the other hand the article also pointed out we have a deficit with China but only in a record amount of $27.8 B. This means we exported $27.8 B less than they exported (an import) to us. It has always been that way with China.
A “trade deficit” is the term for a negative correlation between US import and export amounts. The US is a heavy consumer based country and we traditionally always have a trade deficit since we import more international goods than we export out. What that figure normally doesn’t include is the service industry.
The US has one of the largest service based economies in the world, and realistically, this sector that we can “export” to other countries and then receive “domestic income” for is what we need to push to carry us into the next paradigm shift. The industrial era we experienced is a thing of the past. 3rd world countries and economies are now experiencing their industrial booms and that is why they are able to produce products for less than we can. Most of those economies are also in non-democracy based countries so unions and workers rights don’t even exist which pushes labor costs to a bare minimum. The only product based export that the US has over all other countries is, interestingly enough, food & textiles.
China is dependent on us to buy their goods. So is the middle east with oil. Our trade deficit has shrunk simply because consumer spending is down overall. If the US can become more efficient in it’s spending habits, that gap could slowly close more overtime as other international markets begin to recover and spend again.
Class adjourned.
