Re: Instead of focusing on revenues imbalance,


"Brablo" <gestureofrespect@xxxxxxxxx> wrote in message
news:1133963341.107997.266620@xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
> why not focus on the *earnings/profit* imbalance?
>
> Suppose that China has sold us $1B worth of low-margin goods such as
> socks, plastic toys, and t-shirts. On average, let's say that the
> profit margins on these goods are 5%.
>
> On the other hand, we sold them $0.7B worth of steam turbines,
> management consulting services, software, and other high margin
> goods/services. On average, let's assume that the profit margins on
> these goods/services are 25%.
>
> The trade imbalance is $0.3B in China's favor. NOTE: This does *NOT*
> (IMHO) represent how much more money they have after executing these
> transactions, because the bulk of this money is going back to recover
> costs.
>
> But the earnings imbalance indicate that the USA has $0.175B VS.
> China's $0.050B. This means that the USA has $0.125B more free cash
> than China.
>
> Am I missing something here?
>

It depends on what ultimately happens to the money. Suppose, hypothetically,
that the main reason China's cost is high is due to labor cost. But those
worker put a lot of money in the Bank which buys US treasuries. This would be
no different than if the original Chinese company made a large profit and used
that to buy US treasuries.

By definition, the trade imbalance between two countries is the difference
between the amount of goods and services one sells the other. And for a
particular country the trade imbalance is the aggregate of all of those. It
has little to do with profit - except companies may raise or lower prices to
improve overall profit which may affect the balance.

But in the end, if you have a trade deficit then, by definition, other
countries have your money to buy some of your stuff. And if you have a trade
surplus you have someone else's money to buy their stuff. And, roughly, it
should all zero out.

Bill


.

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