Billionaire investor Wilbur Ross, a supporter of Donald Trump, made the following comment in a letter to the Wall Street Journal (Aug 15): “It’s Econ 101 that GDP equals the sum of domestic economic activity plus “net exports,” i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”
In reality, the last sentence –beginning with “Therefore”– does not follow from the first.
Mr. Ross is alluding to the demand side of National Income Accounts, wherein Y=C+I+G+ (N-X). That is, National Income (Y) equals spending on Consumption (C) plus Investment (I) plus Government (G) plus Net Exports (Imports N minus Exports X).
Taking such accounting too literally, a reduction in imports may appear to be mathematically equal to an increase in overall real GDP. But that is dangerously incorrect, as the 1930s should have taught us.
The accounting is true by definition (a tautology). But economics is about behavior, not accounting identities.
If trade deficits “weaken our economy,” as Mr. Ross asserts, then we should expect to see real GDP slow down when trade deficits get larger and see real GDP speed up when trade deficits get smaller or become surpluses. What the data show is much different – the exact opposite in fact.