The Grocery Store Analogy

In the previous post, I used the grocery store analogy to illustrate why it doesn’t make a lot of sense to depict international trade as zero-sum by looking only at trade deficits and surpluses. I, however, have seen the analogy used to illustrate why it’s not unsustainable for a country — such as, in the United States — to run a persistent trade deficit. I don’t think the analogy is apt for this scenario.

Suppose you and the grocery store are the only “agents” involved in a hypothetical market, and you work at this store and spend all your income on goods sold by the store. A zero trade balance on net implies that you spend just as much as you make: you “export” your labor to the grocery store owner for, say, a total of $100, and you “import” goods from the store owner for a total of $100. A trade deficit means that you export $100 of your labor, but you import (or buy) goods at a total value greater than $100. To afford these goods, you either have to dip into savings (if you have them) or you have to buy them on credit. If we assume that savings are not the main financing method, running a persistent trade deficit implies running up debt.

In a more complicated world, where you don’t necessarily work for the grocery store owner, you may run a persistent deficit with the grocery store. But, if you don’t finance this out of savings or credit, it means you’re running a persistent trade surplus elsewhere. Most of us run trade surpluses with our employer, because we rarely spend all of our income on goods provided by the firm we work for. There are many people who run persistent trade deficits overall, but these people run up their debts or they dip into their savings, and some of them come to find that their current account deficits are unsustainable, and they declare personal bankruptcy (or they’re bailed out). Sans bankruptcy, large trade deficits have to be paid off by sacrificing future consumption, which is not necessarily bad, but when the deficit is persistent there’s reason to believe that there’s some degree of discoordination somewhere.

In the macro world, all of this applies. Of course, that the U.S. has a persistent current account deficit with, for example, China isn’t necessarily a bad thing. What matters more is what our current and capital accounts look like on aggregate, and over time. But, even here, U.S. trade and capital flows over at least the past 20 years do not seem “healthy.” Given the bubble economies that also correlate over these dates, there’s most likely a connection between the two. One thing persistent trade imbalances seem to imply, though, is that there are significant global structural problems, which seems to give currency to the supply-side interpretation of the current international economic malaise.

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