November 06, 2007

In the simple textbook language of national income and product accounting the trade balance is viewed as a leakage. It represents a net export of domestic aggregate demand and as such a net export of jobs. However, what the application of textbook accounting fails to consider is double entry bookkeeping. The trade balance must be matched with another entry, the capital inflows and that represents an increase in domestic aggregate demand. Double entry bookkeeping shows that the aggregate demand effect is a wash.

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