In their insightful textbook, Modern Principles of Economics, Tyler Cowen and Alex Tabarrok pose a thought-provoking question: What transpires when Walmart sources toys from a Chinese supplier? To illustrate this, I embarked on a small expedition to my local Walmart, where I purchased an action figure of Brody King from All Elite Wrestling, part of the Jazwares âUnrivaledâ collection and exclusively available at Walmart. The total cost, including tax, was $21.82. This figure, crafted in China for Jazwaresâa Florida-based companyârepresents an athlete who resides in Georgia and works for another Florida entity, all while being bought and taxed in Alabama. Each step in this global supply chain adds value, but letâs hone in on the portion of the sale that goes to the Chinese manufacturer.
What does this manufacturer do with the dollars earned from selling me the wrestling figure through Jazwares and Walmart? First and foremost, he desires dollars for transactions that require this currency. One option might be to purchase American goods and services. Notably, there’s a growing interest among Chinese entities in acquiring American higher education services. Alternatively, he could invest in the U.S. by buying bonds from American corporations or even lending to the U.S. government through Treasury bonds. He might also consider acquiring dollar-denominated assets, such as existing stocks and bonds. Lastly, he could simply sell the dollars to someone interested in any of these pursuits.
Now, how does this single transaction sway the balance of payments? The trade deficit expands because we imported the figure. This often garners significant attention, but the focus on the trade deficit is frequently exaggerated. In the grand scheme, countries settle their imports with exports. Moreover, those dollars typically find their way back to the U.S. as foreign direct investment. In fact, the current account deficit (the trade balance) is fundamentally equivalent to the capital account surplus.
As we approach the 2024 election, many proclaim that âEcon 101â teaches us that increased imports lead to a drop in GDP since the final component of the GDP equation is Net Exports (exports minus imports). This perspective highlights a misunderstanding of what GDP truly measures and the rationale behind net exports’ placement in the equation. Gross Domestic Product quantifies the total value added to the economy, a concept that becomes increasingly complex in a globalized market where most products carry value added from multiple nations. Many foreign purchases reflect value added in the U.S. as well. Thus, ânet exportsâ captures this reality: âexportsâ showcase the value added here (like design), while âimportsâ subtract the value added elsewhere.
The takeaway is clear: higher imports do not diminish GDP. Numerous contributors played a role in my acquisition of the Brody King figure, not least of whom is Brody King himself, who receives royalties for his likeness. The $21.82 I spent includes value added by the staff at my local Walmart, executives from Bentonville, Arkansas, the truck driver delivering the product, the designers (likely based in the U.S.), and the strategic insights of AEW CEO Tony Khan. While part of the value was indeed added in China, this transaction is recorded in national income accounts as a consumption expenditure, indicating that GDP increases as a result of the purchase, even with the acknowledgment that some of that value was added abroad.
A skeptic might question, âWould it not be preferable if the figure were produced in America by American labor?â Perhaps, but this overlooks the fundamental reason countries engage in trade: comparative advantage. Manufacturing in the U.S. tends to be more costly than in China and other regions, and I was barely willing to part with $21.82 for this figure, having selected it specifically to inform this article and prepare for my concluding class meeting of the semester. Had the price been $30, I would have likely abstained from the purchase. While the proportion of value added domestically may rise, less overall value would be created for us to enjoy.
In discussions surrounding the balance of payments, economists often highlight that the trade balance is one of the most misunderstood economic indicators. âDeficit,â as pointed out by Daniel Klein and Donald Boudreaux, carries a negative connotation, while âsurplusâ is viewed positively. However, this emotional response is misleading. Imports do not harm us; indeed, foreigners can be our allies in economic transactionsâevery exchange underscores this reality.
