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In the Keynesian consumption function (or identity), Y = C + I + G + NX; trade deficits, or negative net exports (NX), subtract from GDP growth, because consumption (C) is overstated.

For example, in a $10 trillion economy, a 5% one year increase in GDP expands the economy by $500 billion. Also, if imports are greater than exports, e.g. $1 trillion of imports and $600 billion of exports, then net imports are $400 billion in one year, which adds to our trading partners GDPs and subtracts from U.S. GDP. However, the total added to the U.S. economy is $900 billion ($500 billion from GDP growth in one year and $400 billion from net imports in one year), because the U.S. is consuming more than producing in the global economy.

It should be noted, with trade deficits, the U.S. exchanges dollars for foreign goods and foreigners exchange those dollars for U.S. Treasury bonds. However, the U.S. is able to maintain trade deficits in the long-run, mostly, because foreigners lose through changes or differences in inflation, interest rates, and currency exchange rates. For example, over the past few decades, the Japanese yen appreciated from 360 to 100 per dollar, which means Japan received fewer and fewer yen per dollar.

Also, to a lesser extent, many of those foreigners moved to the U.S., and foreign firms began producing in the U.S., because it's better to use those dollars than exchange them for their currencies. Moreover, those foreigners can raise their standards of living by selling their assets, exchanging their currencies for dollars, and moving to the U.S., or attending a U.S. college, for example. Furthermore, tourism (by foreigners in the U.S.) adds to U.S. exports.

Comment and article deleted by JazzBumpa in one of his bunk articles:

Much of China, for example, has been a U.S. factory, not counted in U.S. GDP. The U.S. offshored low-end manufacturing, imported those goods at lower prices and higher profits, and shifted (limited) resources into high-end manufacturing and emerging industries.

Consequently, the U.S. not only leads the world in the Information and Biotech Revolutions, it leads the rest of the world combined (in both revenue and profit). The only way to move from one economic revolution into the next is through efficiencies. The U.S. leads the world in the Agricultural-Industrial-Information-Biotech Revolutions (in efficiency of production and market power).

Moreover, China sold its goods too cheaply and lent its dollars too cheaply, to generate a virtuous U.S. cycle of consumption-investment, to raise or maintain its employment.

Unfortunately, the U.S. government kept, spent, and squandered too many dollars rather than “refund” those dollars to U.S. consumers, in the form of tax cuts, to allow the spending to continue (a higher level of consumption also raises saving, and so income rises).

Here’s what James Fallows said about China:

James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar.

January/February 2008

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China.

Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.

Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. The average cash income for (Chinese) workers in a big factory is about $160 per month. On the farm, it’s a small fraction of that. Most people in China feel they are moving up, but from a very low starting point.

This is the bargain China has made—rather, the one its leaders have imposed on its people. They’ll keep creating new factory jobs, and thus reduce China’s own social tensions and create opportunities for its rural poor. The Chinese will live better year by year, though not as well as they could. And they’ll be protected from the risk of potentially catastrophic hyperinflation, which might undo what the nation’s decades of growth have built. In exchange, the government will hold much of the nation’s wealth in paper assets in the United States, thereby preventing a run on the dollar, shoring up relations between China and America, and sluicing enough cash back into Americans’ hands to let the spending go on.

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PeakTrader:

” …the only reason Apple has this money is because of those 80,300 employees or 600,000 employees tied to Apple.”

Those employees have jobs, because of the success and strength of Apple. The money should go to strengthen Apple itself rather than strengthen other firms and the economy by giving Apple employees a $100 billion bonus.

Government is responsible for creating economic conditions for firms to succeed, particularly since it created conditions making it harder for them to succeed.

The U.S. had up to $800 billion a year trade deficits, where U.S. consumers bought foreign goods and foreigners bought U.S. Treasury bonds. Why didn’t the federal government give the money back to U.S. consumers, in the form of tax cuts, rather than spend more than all of it.

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Also, I may add, there were misconceptions by a couple of people about how real GDP is measured, which I may clear up.

Generally, in the Keynesian consumption function (or identity), Y = C + I + G + NX; trade deficits, or negative net exports (NX), subtract from GDP growth, because consumption (C) is overstated.

For example, in a $10 trillion economy, a 5% one year increase in GDP expands the economy by $500 billion. Also, if imports are greater than exports, e.g. $1 trillion of imports and $600 billion of exports, then net imports are $400 billion in one year, which adds to our trading partners GDPs and subtracts from U.S. GDP. However, the total added to the U.S. economy is $900 billion ($500 billion from GDP growth in one year and $400 billion from net imports in one year), because the U.S. is consuming more than producing in the global economy.

The U.S. is able to maintain trade deficits in the long-run, mostly, because foreigners lose through changes or differences in inflation, interest rates, and currency exchange rates. For example, over the past few decades, the Japanese yen appreciated from 360 to 100 per dollar, which means Japan received fewer and fewer yen per dollar.

Also, to a lesser extent, many of those foreigners moved to the U.S., and foreign firms began producing in the U.S., because it may be better, for them, to use those dollars than exchange them for their currencies. Moreover, those foreigners can raise their standards of living by selling their assets, exchanging their currencies for dollars, and moving to the U.S., or attending a U.S. college, for example. Furthermore, tourism (by foreigners in the U.S.) adds to U.S. exports.

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