PeakTrader.com

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PeakTrader said...

Much of economics is counterintuitive. The U.S. has benefited tremendously from free trade, in part, because consumer surplus has been grossly understated.

If the true benefit of consumer surplus was reflected in the trade balance, U.S. trade deficits would actually be trade surpluses.

However, we may benefit less, because the net gains of domestic production may be more than offset by the net losses of domestic consumption.

So, although a "manufacturing renaissance" will contribute to GDP, it can also contribute to lower living standards.

And to explain how U.S. trade deficits are actually trade surpluses:

If someone is willing to sell you something at half price, then you may buy three units instead of one unit (given your budget constraint).

So, for example, you'd import three units for $15 and export one unit for $10, creating a $5 trade deficit.

However, you really exchanged your $10 good for three $10 goods, or $30, i.e. a $15 surplus (because you paid $15 for $30 worth of goods).

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Jason said...

"However, you really exchanged your $10 good for three $10 goods, or $30, i.e. a $15 surplus (because you paid $15 for $30 worth of goods)."

Peak, I understand your argument. However, the goods we import are worth less once the consumer has taken delivery. For instance, a TV bought for $1000 is worth less once it is out of the box. Most imported goods used prices behave similarly. Perhaps only things like jewelry or oil (commodities) wouldn't. Doesn't your argument assume the intrinsic value of the good stays fixed?

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PeakTrader said...

Jason, consumer surplus is the difference between what you're willing to pay for a good and what you actually paid.

If your favorite box of cereal sells for $4.99, you may buy one box.

However, if it's on sale for $1.99, you may buy three boxes.

Consumer surplus doesn't diminish after you open and eat your cereal.

Luxury goods, e.g. a $1,000 TV, normally have less consumer surplus than normal goods.