Maybe We'd Be Better Off with Less Commerce

by Don Boudreaux on February 11, 2006

in Trade

"Trade is far and away the largest weight on the U.S. economy at
present," said Mark Zandi, chief economist at Moody’s
"This is a risky time."

So we read in yesterday’s Washington Post.

Suppose Mr. Zandi had instead used a synonym for "trade": commerce.  Does it make sense to say that "Commerce is far and away the largest weight on the U.S. economy at present"?

I think not.  How in the world can trade — commerce — voluntary exchange — be a ‘weight’ on an economy defined overwhelmingly by a deep and extensive division of labor?

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spencer February 11, 2006 at 4:07 pm

Because that is not what he is talking about or doing.

He is simply doing a simple summing up of the gdp components to determine the total.
Consumption add x%, investment adds z%, government adds y% and the international trade balance subtracts w%.

If you want to argue that these sectors really add or subtacrt a different sum because you need to calculate other costs and benefits of these components that is fine. But he is not saying anything like what you imply.

Don Boudreaux February 11, 2006 at 4:17 pm

Seems to me that Zandi is insinuating that Americans' commerce with foreigners is risky — that if we Americans trade less with foreigners (and, presumably, more with ourselves) then our economy would be stronger and less risky.

And with this insinuation I disagree.

Christopher February 11, 2006 at 9:02 pm

Dr. Boudreaux, you perfectly summed it up w/ your comment: "How in the world can trade — commerce — voluntary exchange — be a 'weight' on an economy defined overwhelmingly by a deep and extensive division of labor?".

I am at a loss to even guess what this guy was thinking.

spencer February 12, 2006 at 12:16 pm

What he is saying is that the way gdp is calculated that when we import more then we export it is a negtive for gdp growth. That is a simple accurate statement. Why would anyone who has ever been introducted to any economics think anything different?

Don Boudreaux February 12, 2006 at 12:33 pm


If you are correct, why does Zandi say "This is a risky time."? Clearly, Zandi is troubled by the extent and pattern of Americans' commerce with non-Americans.

FXKLM February 12, 2006 at 1:10 pm

Spencer: If I read you correctly, you are suggesting that Mr. Zandi is concerned about the effect of trade on the reported GDP figure, but not concerned about the substantive effect of trade on our economic well-being. I don't think that's a reasonable interpretation of Mr. Zandi's statement.

spencer February 13, 2006 at 9:06 am

Zandi is an economic forecaster. He is not talking about anything subantive either way. All he is talking about are short run growth prospects.

Don Boudreaux February 13, 2006 at 4:54 pm

"This is a risky time" strikes me as Zandi's attempt to say something substantive.

triticale February 13, 2006 at 9:44 pm

Bad transcription. "Trade is far and away the largest wait on the U.S. economy at present," and the time while waiting for the trade goods to arrive is risky.

liberty February 14, 2006 at 12:50 am

Ha, I like that trticale.

GDP is not really important, its GDP per capita that matters and over a given time period, as affected by a previous period. GDP as calculated by some economist may subtract the trade deficit, but GDP growth will be positively affected by the transaction – that is why we trade. It is a static falacy to imagine that trade reduces standard of living, whther there is a deficit or surplus in exports. Seen dynamically it will increase standard of living for both trade partners.

Noah Yetter February 14, 2006 at 2:49 pm

The GDP calculation itself is the fallacy. We measure consumption to proxy for production, then use it as a heuristic for economic well-being, which is more strongly tied to consumption anyway. If we were really trying to measure well-being we wouldn't subtract imports, and we certainly wouldn't add government spending (indeed we should subtract it).

And then there's the fact that the margin of error on GDP measurements is so large that growth rates are indistinguishable +/- 1%, which is absolutely huge.

You would have better luck making your market picks based on the weather than on GDP.

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