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American output increased at a 3.2% rate in the fourth quarter, but real American income only increased at a 1.3% rate!
Howard Richman, 2/4/2011

On January 28, the Bureau of Economic Analysis (BEA), released preliminary GDP numbers which stated that although American production grew at a 3.2% rate in the fourth quarter, real American incomes only grew at a 1.3% rate. The difference was the price of imports. Import prices rose at an 18.9% rate.

Specifically, nominal GDP grew by at a 3.4% rate, while inflation in the prices received by American producers grew at a 0.3% rate. Meanwhile, prices paid by American purchasers grew at a 2.1% rate making the growth in American purchasing power just a 1.3% rate.

Table 4 of the press release breaks out the inflation rate for products purchased by Consumers, Investors, and Governments:

  • 1.8% - inflation rate in Personal Consumption Expenditures
  • 2.3% - inflation rate in Investment Expenditures
  • 3.1% - inflation rate in Government Expenditures.
  • 2.1% - Overall inflation rate for Gross Domestic Purchases.

Apparently, foreign prices (largely due to relative exchange rates) went up much faster than American prices during the fourth quarter. The good news is that American products were getting more competitive in world markets. The bad news is that American purchasing power was only growing at a 1.3% pace, due to the inflation in the prices of imports.

These statistics give us a taste of what would happen within the American economy if we continued to bring trade toward balance. American sales in world and American markets would expand. American producers would have larger revenue and would likely invest in order to expand American production. In the long-run American incomes would grow due to new jobs in our trade-oriented sectors. But, in the short run, American purchasers would not see their buying power growing at all fast due to the rising prices of imports.

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Comment by Howard Richman, 2/24/2011:

The last paragraph is not quite accurate. It says, "American producers would have larger revenue", but it should say "American producers would have larger sales."

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]