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Trade-Deficit Clarification

Here’s a letter that I sent today to The Economist:


write that foreigners who buy dollar assets "finance the country’s vast
current-account deficit" ("The Falling Dollar," Dec. 2).  By suggesting
that America’s current-account deficit necessarily bodes ill for
Americans, your language misleads – on two counts.

First, this
deficit is at least as much the RESULT of foreigners seeking to invest
in the U.S. as it is of Americans importing lots of goods and
services.  The more attractive America becomes to investors, the more
foreigners invest here.  These investments expand the U.S. economy and
increase the U.S. current-account deficit.

Second, only about
half of America’s imports are consumer goods.  The rest are
intermediate components, raw materials, and capital goods.  In fact,
capital goods today are about a quarter of all U.S. imports, up from
only four percent of imports in 1960.*

Donald J. Boudreaux

* Douglas A. Irwin, Free Trade Under Fire, 2nd ed. (Princeton University Press, 2005), page 12.