[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

to be a simple matter: the buyer pays American dollars to a car dealer. The car
dealer buys the car—in dollars—from an importer. The importer buys the car from
the German manufacturer, who wants to be paid in euros. For the importer, this is
no problem. He goes to a bank, perhaps in Germany, and exchanges his dollars for
euros. But the bank will not hold on to those dollars. It will sell them, either to someone
wanting dollars to purchase U.S. goods or to someone wanting to invest in a
dollar-denominated asset.
Every dollar an American spends to buy a foreign import eventually comes back,
either to buy American exports or to buy an investment in the United States. We
can express this relationship by a simple equation:
imports (IM ) into the United States = exports (E) + NCF.
Subtracting exports from both sides, we obtain the basic trade identity:
trade deficit = IM − E =−NX = NCF.
This is just what we obtained earlier by considering the equilibrium in the capital
market. The sum of net exports and net capital flows is equal to zero.
Thus, a trade deficit and a net inflow of foreign capital are two ways of describing
the same thing. This can be reframed yet again: the only way American consumers
and businesses can import more from abroad than they export is if foreigners
are willing to make up the difference by lending to or investing in the United States.
In a world of multilateral trade, the accounts between any particular country
and the United States do not have to balance. Assume that Japan and Europe are in
trade balance and the United States and Europe are in trade balance. Assume also
that Japanese investors like to put their money into Europe and Europeans like to
invest in the United States. Europe will have a zero net capital inflow, with its positive
capital inflow from Japan offset by its negative outflow to the United States.
Under these circumstances, the U.S. trade deficit with Japan is offset by a capital inflow
from Europe. But what must be true for any country is that total imports minus total
exports (the trade balance) equals total net capital inflows.
The basic trade identity can describe a capital outflow as well as a capital
inflow. In the 1950s, the United States had a substantial trade surplus, as the
Internet Connection
U.S. TRADE DATA
You can find the latest data on U.S. foreign trade, from information
on the overall trade balance to the specifics of our trade
with individual countries, at www.ita.doc.gov/td/tic/.
THE BASIC TRADE IDENTITY ∂ 573