Regular reader Alan Goldhammer wrote:
I fully understand how rates work and know that the calculation for the mutual rates was something that was drawn from a hat (or a defective AI tool). However, I do not know whether import is completely modeled for how much they add to the US economy. Every small company that brings Chinese products to sell, adds value by creating jobs and the money they generate from sales goes to federal, national and local authorities in the form of taxes. Why would this added value not be deducted from the trade deficit? Is this also added to the American GDP? Maybe these are just naive asking, but as you know I am not an economist.
I told Alan per e -mail that it is not a naive question and I have answers.
I will not concentrate on the role, or not on AI when calculating ‘mutual rates’. As it is clear from his question, that is not what Alan asks about.
Here is his most important sense:
Every small company that brings Chinese products to sell, adds value by creating jobs and the money they generate from sales goes to federal, national and local authorities in the form of taxes.
That is almost true. Some From the money from the sale of those products goes to governments. Most goes to the sellers and they are not a chopped liver. We measure their profit based on the difference between their income and their costs, assuming that all costs, and not only with the costs of the Chinese inputs, are taken into account.
Also yes, those selling creates jobs, but the way we economists measure the profit for employees from those jobs are not those jobs. It is not even the wages, salaries and benefits that those employees receive, because counting wages, salaries and benefits breaks their profit. They have an opportunity costs, namely the next best job in which they would be if they were not in their current jobs. Their profit is therefore their wages, salaries and benefits minus wages, salaries and benefits they would get in their second best job.
So far I have omitted a very important group: ultimate consumers of those goods. We economists call their profit ‘consumer surplus’. Consumer surplus is the maximum amount that consumers are willing to pay minus the amount they pay.
Now to the 2 questions from Alan:
Why would this added value not be deducted from the trade deficit? Is this also added to the American GDP?
The value is not deducted from the trade deficit because the trade deficit was never intended to measure value: the measurement flows. The American trade deficit with China is the difference between what we spend Americans on Chinese goods and services and what people in China spend on our goods and services. It says nothing about the amount of value we receive from those goods and services from China, except that the value must exceed what we spend or we would not buy those goods and services. In short, we are gaining trade.
In a sense, Alan’s “naive” question points to one of the most important problems with even talking about a trade deficit. How bad can a trade deficit be when the values of that import, consumers, for producers and governments are greater than the amount we spend?
In other words, I think that Alan rightly sees these values and is asking: “What is the problem?” He is right to ask himself.
Now to his second question: “This is not this [value] Also added to the American GDP? “The increase in wages, benefits and salaries as a result of the import is part of GDP.