When folks in this country send money to friends and relatives out of the country how do we calculate the loss to our economy? Would it fall in with the trade deficit numbers??
The USD is a the planets main reserve currency, so that is not a factor for the US as it is for other countries.
Money also leaves the country when someone imports goods or services, so it has much the same effect as an import.
Transfers are included with trade numbers as part of the current account.
There’s no inherent or necessary loss to the economy.
Some pieces of paper went overseas. (Basically. To simplify.) The paper is valuable, yes. But the paper was earned from the person here doing valuable work, literally creating the value for the economy which earned them income in the form of that paper. The value of their work is still here, however. Only the paper is gone. The paper is not part of the production of our economy. Ultimately, it’s just paper.
No, the trade balance is calculated from the difference in value between exports and imports of real goods and services, not transfers of money.
A negative trade balance means that “more” stuff came into the country than went out, with “more” defined as a higher dollar value assigned to the stuff. A money transfer is neither an export, nor an import (it’s not production), and so does not show in the trade balance. When the trade balance is negative – a trade “deficit” – this also does not indicate any necessary or inherent loss to the economy. It just means we received more stuff than we sent out. That’s it. They sent us real stuff. They got paper in return.
But there is indeed an account that keeps track of this net flow of paper.
Remittances are included in the income category of the Current Account. The trade balance is another component of the current account.
When the current account balance is negative – a current account “deficit” – the net flow of this particular kind of paper is out of the country. Again: not a necessary loss to the economy.
The simplistic principle is that the current account (which includes trade, income, remittances & transfers which are not capital investments) influences the value of a floating currency. A sustained current account deficit (/surplus) will eventually put downward (/upward) pressure on the currency, which makes exports cheaper and imports more expensive (/or vice versa) until the current account is in balance.
Any current account deficit must be financed by capital flows. To the extent that foreign investors are willing to do so, a current account deficit may be sustained. That’s the situation with the U.S. - the Chinese and others finance our current account deficit by buying U.S. paper.
Good summary of the principle.
One of the most interesting wrinkles on that basic principle is the quality of the paper that’s being exchanged. More “paper” flows out of the US than comes into the US, and has for a long time, but the quality of that paper is not the same. So to speak. Assets in foreign countries owned by Americans might be increasing in value more quickly than American assets owned by foreigners. If you wake up tomorrow and your paper is worth twice as much, then hell, you can buy more shit. That shit you buy will look like yet another exchange of stuff for paper, but it’s not. Not exactly, anyway. It’s not new paper that’s financing it. Your own receipt of foreign paper yesterday is financing yet more foreign stuff today, it’s just out of proportion to its original value from yesterday.
This difference is referred to as “positive valuation effects” in the wiki article, and it’s one possible reason (among others…) why a negative current account balance could be sustained quite a long time without the currency losing value.
Another issue is the “official” categories in the data. Condos in Miami sold to Russians and Brazilians? Not technically an “export”. The condo is still right there in Florida. But I mean… it really truly does act like an export as far as currency effects are concerned. Americans import electronic stuff, and “export” condos. In practical effect, trade can actually be much more “balanced” than the official numbers suggest.