POST PRANDIUM: Why do we have a large trade deficit?
FERNANDO FAJARDO
In most of the years since the last war, our imports exceeded our exports. What causes a trade deficit?
What does it mean to the economy and to us?
We can answer these questions this way.
On the supply or production side, our total output or GDP is largely determined by the amount of capital invested and labor employed, using a given level of technology in the various sectors of the economy. The more capital invested and labor used and the higher is the level of technology applied, the bigger would be the total output.
On the demand side, our total output is also determined by the level of our final household consumption expenditures, final government consumption expenditures, capital formation (investments) made by both government and private sector, plus our net exports.
Net export is the difference between imports and exports. Net export is negative when imports are more than exports and positive when imports are less than exports. When they are equal, we have a balance trade.
A negative net exports tend to put a pressure on the strength of the peso when exchanged with the US dollars that we use in trading with the rest of the world.
It follows, then, that when we import more than export, our total output is smaller than our aggregate demand. When our aggregate demand is greater than our total output, the consequence is higher inflation rate.
The size of our exports and imports, therefore, is a matter of great concern to the economy and to all of us.
The table below shows the total value of our exports and imports (FOB in million US $) in selected years beginning in 2000 up to 2017 and the corresponding trade balance and peso-dollar exchange rates (buying and selling).
What makes our imports greater than our exports?
As stated earlier, from the demand side our total output is determined by the level of final household consumption expenditures, final government consumption expenditures, capital formation (investments).
Household consumption expenditures, government consumption expenditures, and investments are made for both domestically produced and imported foreign goods.
Therefore, when there is an increase in household consumption, government consumption, and investments, chances are more of these are also made for foreign goods. Thus, any increase in these three types of expenditures is bound to increase imports. If very little of what we produced domestically is exported, the result is bigger next exports or bigger negative trade balance.
The latest national accounts data shows that government expenditures and investments increased greatly last year by 12.8 percent and 14.0 percent, respectively, up from 7.0 percent and 9.5 percent in 2017. On the other hand, household expenditures, which accounts for almost 70 percent of our total output grew only by 5.6 percent last year, down from 5.9 percent in 2017.
Another thing shown in the national accounts was for our total exports to increase only by 11.5 percent last year while our imports went up by 14.5 percent.
The result was for our total output or GDP to grow only by 6.2 percent, down from 6.7 percent in 2017. This also came with inflation rate going up to 5.2 for the whole year of last year compared to only 2.9 percent in 2017.
There you are.
Disclaimer: The comments uploaded on this site do not necessarily represent or reflect the views of management and owner of Cebudailynews. We reserve the right to exclude comments that we deem to be inconsistent with our editorial standards.
