Dollars and Jens
Friday, January 11, 2008
trade deficit
The U.S. trade deficit in November surged to the highest level in 14 months, reflecting record imports of foreign oil. The deficit with China declined slightly while the weak dollar boosted exports to another record high.

The Commerce Department reported that the trade deficit, the gap between imports and exports, jumped by 9.3 percent, to $63.1 billion. The imbalance was much larger than the $60 billion that had been expected.
That jump is a bit more than someone hoping an improving balance of trade will cushion the economic slow-down might have hoped to see. I'd like to note, though, that the U.S. trade deficit jumped 9.3% in dollars; if you measured it in euroes, for example, it would be a few percentage points less. The way this enters real GDP will be with price changes in imports and exports divided out, so to the extent that this number is driven by high oil prices driving up the value of imports, it will show up as inflation but not as a drag on real growth.

(It seems to me this is likely to be a common effect of currency devaluation in a country with a trade deficit: in the short term, at least as measured in the local currency, the trade deficit is likely to get worse, though in real terms, and probably in the longer term in terms of domestic currency as well, the tendency to drive global consumption toward that country's products would reduce the trade deficit. This assumes short-term price stickiness that would reduce over longer time-horizons, and might be a smaller effect in the United States than in other countries insofar as a lot of globally traded products are invoiced in U.S. dollars — if prices are sticky in the domestic currency of the country under consideration, import and export prices won't correlate with currency devaluation the way I've assumed here.)

(Lest anyone be confused by this: the rising price of oil here wasn't necessarily due entirely to the drop in the dollar. Insofar as it was, this is a generalized phenomenon relating the effects of a depreciating currency. Insofar as it wasn't, it's an idiosyncratic event that will still flow into inflation numbers rather than real growth numbers.)

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