Friday, September 10, 2010

July Trade Deficit and Gross Domestic Product

As many of you know, the July Trade Deficit numbers were published by the US Census bureau yesterday.   While many of these numbers were reported in the news,  I wanted highlight a few facts.
  1. The total trade deficit for goods and services decreased by 14% from June to July
  2. The total amount of the change was due to a 12% deficit decrease in goods.   Services remained unchanged.
  3. Imports of goods and services each decreases in total by 2% each.   Exports of goods increased 3% while services remained unchanged
At an aggregate level, this indicates that the US imported less from other countries from the previous month while increasing the amount exported.   This is a good trend. 

As I started to look at the trade balance numbers, I wondered about how important our trade deficit is to our overall economic health.  Conventional wisdom would say that it is always better to be providing more goods to the rest of the world than you import.   I might argue that parity is probably the best thing. None the less, I think it is important to understand how big our trade deficit is compared to our overall Gross Domestic Product.

For those of you that don't know what GDP is (and I didn't really understand it either), it is defined as the  amount of goods and services produced within a country in a calendar year.   GNP is measured a few ways, but the most common way is based on the 'consumption model.'    Economist measure all the goods and services consumed by individuals and businesses, all residential and non residential fixed investments,  total goverment spending on both the federal, state, and city levels.   Subtracted from this number is the net trade deficit.   This is done to back out goods consumed in this country but produced elsewhere.

Our current GDP is about $14.5 trillion.   Some interesting components that make up this number:

Durable Goods.   This includes autos, household items, recreational items, etc.   GDP $ 1.07 Trillion or 7.5% of the total

Non Durable Goods.  Items such as food, clothing, gasoline, and other energy products.   GDP $2.3 Trillion or 15.8%

Household Consumption Services.   This includes non mortgage housing expenses, healthcare, financial services and insurance, transportation services.   GDP $6.6 Trillion or 45.5%.   Interesting to note that health care expenses represents 11% of GDP.

Non Profits.  Total consumption of households of Non for Profit organizations services.  GDP $265 Billion or 1.8%

Fixed Investments by Businesses.   Investments in factories, equipment, buildings, and transportation.   GDP $1,406  or 9.8%.

Residential Fixed Investments.   As the name implies, individual's investments in their homes.   GDP $358 Billion or 2.5%

National Defense.   $812 Billion or %5.6

Federal Government, Non Defense.   $393 Billion or 2.7%

State and Local Government.  $1,786 or 12.3%

And finally, the total amount of Net Imports backed out of our GNP is $563 Billion or approximately 3% of our GNP.   The implication I take from this is that our economy generates $14.5 Trillion of consumption/production each year, but of that only 3% of those goods and services we consume are coming from overseas.   Seems like a fairly paltry number given all the hype about our deficit and the anti 'Made in China' sentiment we are constantly hearing about.   Can this be right?

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