Wednesday 24 April 2013

Economic Myths: The UK economy is "reliant on trade"

From the City AM editorial:

ONE should never read too much into any one set of numbers, but yesterday's batch of global economic indicators was grim. America, China and Germany are all slowing sharply, suggesting that world growth is dipping again. For economies such as Britain's, which are reliant on trade, this isn't good news...

Good grief.

a) All economies are reliant on "trade", it's the only way of measuring it and "economy" and "trade" are more or less the same thing anyway. The bulk of wealth is created by specialisation, the flip side of which is that there has to be more exchange (or "trade") between specialists. Work you do for yourself is difficult to measure or value, as is barter (even though all "trade" is ultimately barter, "money" is just a unit very handy unit of measurement).

b) Whole countries don't export to or import from each other. Some people make stuff and other people consume it. If you buy oranges in the UK, then they are "imported", if you buy oranges in Israel, they are "domestic"*. And if an Israeli tourist in London buys an orange then the Israeli farmer counts it as export and the UK wholesaler counts it as import, but spending by Israeli tourists in the UK counts as an export from the UK's point of view and as an import from Israel's point of view. It's still just orange growers selling oranges to people who like eating them.

c) As a matter of common sense and observation, the larger an economy is (more people or higher GDP), the smaller is the share of imports and exports as a fraction of GDP. For example, if all the countries in the world were merged into a single country, the sum total of exports or imports would be precisely $nil. And if Scotland becomes independent, all the sales to and purchases from "rest of UK" which hitherto counted as domestic will now show up as imports or exports, even though nothing has really changed. So assuming that he means "imports and exports" when he says "trade", then "trade" is inversely proportional to GDP or population size.

d) The UK is a relatively large economy and using regression analysis, we would expect imports and exports to be about 40% of our GDP. As it happens, the UK is also an island which is not at a convenient spot on the international trade routes and our imports and exports are "only" 32% of GDP.

So misleading crap as per usual.

* I've no idea whether the Israelis still grow and export oranges. They did when I was a lad.

8 comments:

Lola said...

Very good argument for scrapping excise duties and free trade..

Anonymous said...

L, actually I was just saying, on the actual facts in real life, the UK economy is not particularly reliant on imports and exports.

The arguments for not taxing the free exchange of goods and services (whether within or across national borders) should be self-evident anyway.

mombers said...

Maybe the Homey-in-chief is talking about the City's reliance on skimming off fees on its disproportionate share of international transactions (some of which are remarkably still actually connected to the trade of goods and services)?

Anonymous said...

M, the article appears to be vaguely about the real economy in general.

(And while I disapprove of bank skimming, I see them like pirates. As long as they are only robbing from foreigners, then they can have their Letters of Marque and we can just turn a blind eye to it.)

Bayard said...

"then they can have their Letters of Marque"

Doesn't that make them privateers, not pirates?

Mark Wadsworth said...

"Zut alors! Ve are being attacked by ze Breetish pirates!"

"Don't vorry, Jacques, zey is only privateers from Ze Guernsey"

"Oh, zat ees all right zen. I sought zey were pirates."

DBC Reed said...

MW With Bayard on this: if they are state-approved skimmers they are privateers.
There is an all-time economic howler which says we must export more than we import: taken to extremes we would export everything we produce and import very little. This is a recipe for denuding the country of goods.

Bayard said...

DBC, surely, in that case, if we import more than we export we risk denuding the country of money.