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Don’t Believe What You Read: Bigger Trade Deficit = More Economic Growth
Posted By Bryan Riley On January 14, 2013 @ 2:30 pm In Economics | Comments Disabled
The latest trade deficit figures  are out, and like always, most reporters fail to accurately explain what these numbers mean.
During the past 10 years, there has been a clear relationship between trade deficits  and U.S. economic growth. Most news coverage got the relationship backwards. Consider the following reports:
In fact, when trade deficits increase, our economy grows faster than when trade deficits decline.
For example, Heritage Foundation calculations based on Bureau of Economic Analysis data show  that in 2009 the trade deficit (measured in inflation-adjusted dollars) increased by 18 percent. If the trade deficit is a drag on economic growth, then our economy should have tanked. Instead, real gross domestic product (GDP) increased by 2.4 percent.
In contrast, in 2008 the trade deficit declined by 24 percent. Based on the “trade deficits are a drag on the economy” theory, our economy should have taken off. Instead, real GDP shrank by 3.1 percent.
During the past 10 years, whenever the trade deficit increased, real GDP always increased—on average by 2.7 percent. But when the trade deficit decreased, real GDP did not boom–in fact, it increased on average by less than one-tenth of 1 percent.
To be fair, many reporters rely on economic “experts” who claim that trade deficits are bad for the economy. But the numbers don’t back them up. And the recently released 2013 Index of Economic Freedom , published by The Heritage Foundation and The Wall Street Journal, shows that countries with low trade barriers are much more prosperous than those that restrict imports. That’s the type of news reporters should share when discussing the impact of trade.
Article printed from The Foundry: Conservative Policy News Blog from The Heritage Foundation: http://blog.heritage.org
URL to article: http://blog.heritage.org/2013/01/14/dont-believe-what-you-read-bigger-trade-deficit-more-economic-growth/
URLs in this post:
 latest trade deficit figures: http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm
 deficits: http://www.heritage.org/federalbudget/
 show: http://www.bea.gov/iTable/index_nipa.cfm
 2013 Index of Economic Freedom: http://www.heritage.org/index/about
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