The United States has bought more from the world than it sold for 50 years in a row

50 years of U.S. trade deficits, every single year from 1976 to 2025

Is that a sign of weakness, a sign of strength, or neither? And if the rest of the world keeps sending more goods than it gets back, what does it receive in return?

Open with the number. It comes from the notebook’s Fig. 2 key numbers: from 1950 to 1975 the United States ran a surplus in 23 of 26 years; after 1975 there is not a single surplus year. The website version of Fig. 2 reports “deficits in 50 of 50 years” for 1976–2025.

Ask the room before you say anything else: is a trade deficit bad news? Take a quick show of hands: bad, good, or “it depends”. Most students, and many politicians, answer “bad”, as if trade were a game with a score. The chapter’s answer is “it depends”, and by the end we will know on what.

Then the second question on the slide is the key to the whole chapter: nobody gives away goods for free. When the world sends the U.S. more than it receives, it gets financial claims in return: bonds, shares, dollars. A trade deficit is borrowing.

Today: three questions

• What are the facts of trade? How much the U.S. trades, its deficits since 1976, and who runs the matching surpluses.
• Why do countries trade at all? Accounting identities, then four small economies: exchange, risk sharing, comparative advantage and migration.
• Are deficits and foreign debt a problem, and what should policy do? Fast growers, twin deficits, the foreign debt; tariffs, the losers from trade, migration.

These are the three acts of the deck and the three branches of the mind map on the title slide.

The headline: a trade deficit is a loan from abroad, and loans are repaid, in present value. Trade itself, by comparative advantage, can make every country better off, though not every worker.

This chapter has no new model figure. Its tools are identities (true by definition) and small worked economies that we solve with pencil and paper, so Act II is a set of equations and tables. Acts I and III are data.

The facts of trade

Act I

Fact 1: how much does the United States trade?

What share of U.S. GDP is sold abroad, and what share is bought from abroad? How does that compare with 1950?

Ask the room first and collect two or three guesses for each number. Many students think the U.S. is a very open economy, because imported goods are everywhere in their daily life. Ask them to guess before the chart: 5 percent? 20? 40?

U.S. exports and imports have both roughly tripled as a share of GDP since 1950

Data: U.S. Bureau of Economic Analysis, National Income and Product Accounts, via FRED (EXPGSA, IMPGSA, GDPA). Chart inspired by Fig. 19.1 in Jones (2024), Macroeconomics, 6th ed.

How to read it: U.S. exports and imports of goods and services, each as a percent of GDP, every year from 1950 to 2025. Labels at the right end name the lines. The title reports the first and the last year.

Point at three things:

1. The level: in the 1950s each line sits at about 4 to 5 percent of GDP.
2. The two lines move together until the early 1970s; then imports pull above exports and stay there. The gap is the trade deficit of the next figure.
3. The dips: trade falls in world recessions (2009, 2020) and in the strong-dollar years of the mid-1980s, when exports fell to about 7 percent of GDP.

Hover over 2011 to show the peak of openness.

The U.S. trades much more than in 1950, yet it is one of the least open economies

• 1950 to 2025: exports 4.1% → 10.8% of GDP, imports 3.9% → 13.8%. Exports + imports peaked at 30.8% in 2011.
• Imports have been above exports every year since 1976.
• In 2024 only 4 of 172 economies traded less relative to GDP: U.S. 25%, China 38%, Germany 79%, Singapore 313%.

Large economies trade less as a share of GDP: much of their trade happens inside their own borders.

Numbers: the notebook’s Fig. 1 key numbers and its WDI openness ranking for 2024 (the U.S. is number 5 of 172, counting from the least open; U.S. 25.0, Brazil 35.6, China 38.0, Japan 44.8, India 45.9, Germany 79.1, Ireland 246.2, Singapore 313.3 percent of GDP).

A teaching moment from the notebook: the textbook says the two shares rose to “around 12 and 15 percent, respectively”, but it lists them the wrong way round. Exports were 11.65 percent of GDP in 2022 and imports 15.18 percent. And “under 5 percent in the 1950s” holds only after rounding: exports reached 5.07 percent in 1957.

Why so much more trade? The textbook’s two reasons: transport and communication costs fell (shipping, air freight, phone calls), and tariffs fell through trade negotiations.

How can Singapore trade 313 percent of its GDP? A trading hub imports goods and re-exports them, so exports and imports can each exceed GDP, which counts only the value added at home.

The book chapter’s many-country version of this figure (left out here) lets you pick any economy from the World Bank data.

Fact 2: the trade balance

When did the United States last sell more to the world than it bought from it?

Ask for guesses: the 1990s boom? The 2000s? Many students guess a recent year. The answer is 1975.

Remind the room of the definition: the trade balance, or net exports, is exports minus imports. Positive is a surplus, negative a deficit.

The U.S. ran small surpluses until 1975, and a deficit in every year since

Data: U.S. Bureau of Economic Analysis, National Income and Product Accounts, via FRED (EXPGSA, IMPGSA, GDPA, A019RC1A027NBEA). Chart inspired by Fig. 19.2 in Jones (2024), Macroeconomics, 6th ed.

How to read it: the U.S. trade balance as a percent of GDP. Above the dashed zero line exports exceed imports; below it imports exceed exports. The slider picks the first year of a window that ends in 2025; the window is shaded, the dotted line is the average trade balance over the window, and the title reports that average and the number of deficit years.

Do live:

1. Start at 1976: an average of −2.55 percent of GDP, deficits in 50 of 50 years.
2. Move the slider to 1950: the average over 1950–2025 is still negative, about −1.5 percent. Trade has not balanced over 75 years.
3. Move to 2000 and 2010: the deficits of the 2000s were the largest.

Point at the two waves: about 3 percent of GDP in 1987 and 5.7 percent in 2006, and close to 3 percent since 2009.

The deficit grew in two waves and has stayed near 3% of GDP since 2009

• 1950–1975: a surplus in 23 of 26 years. After 1975: none.
• The largest deficit: 5.69% of GDP in 2006. In that year Americans used 105.7% of what they produced.
• Recent years: an average of −2.91% over 2023–2025.

A deficit means a country uses more goods than it makes. The difference arrives from abroad, on credit.

Numbers: the notebook’s Fig. 2 key numbers. The textbook says 5.6 percent for 2006; the data have been revised since, and the current figure is 5.69 percent. The three deficit years before 1976 were 1953, 1972 and 1974.

The 105.7 percent comes straight from the national income identity of Act II: NX = Y − (C + I + G), so with a deficit of 5.7 percent of GDP, domestic uses C + I + G were 105.7 percent of GDP.

Beyond the U.S. (fig. 2b in the book chapter, left out here): among the G7, only the U.S. and the U.K. ran deficits on average from 1976 to 2024. The U.S. average, −2.55 percent, is by far the largest; Germany’s surplus, +1.95 percent, is the largest.

Ask: if the U.S. borrows every year, who is lending? That is the next figure.

Fact 3: the other side of the U.S. deficit

If the United States imports more than it exports, which countries export more than they import, and by how much?

The world as a whole is a closed economy: every import is someone else’s export. So the U.S. deficit has to show up as surpluses somewhere else. Ask: which countries come to mind first? Students usually say China; ask whether Germany or Japan could matter as much.

China’s surplus covers the largest part of the U.S. deficit

Data: Groningen Growth and Development Centre, Penn World Table 11.0 (csh_c, csh_i, csh_g, cgdpo; Feenstra, Inklaar and Timmer 2015). Chart inspired by Fig. 19.3 in Jones (2024), Macroeconomics, 6th ed.

How to read it: for each country, two bars. The blue bar is the trade balance as a share of the country’s own GDP. The green bar rescales it to a share of U.S. GDP, so that the green bars can be added up and compared with the U.S. deficit. The U.S. bars are equal by construction. The Penn World Table does not report net exports directly; the notebook computes them as 1 − c − i − g from the GDP shares of consumption, investment and government purchases. The slider picks the year.

Do live:

1. Start at 2023: the U.S. deficit is 5.4 percent of GDP in this source, and China’s surplus is the largest, 4.42 percent of U.S. GDP.
2. Move to 2005 and 2000: before 2005, Japan’s or Germany’s green bar was the largest.
3. Point at Germany: its blue bar is tall (a large surplus for its own size) but its green bar is short, because Germany is much smaller than the U.S.

Since 2017 China’s economy at PPP is larger than the U.S. economy in PWT 11.0, so China’s green bar is now taller than its blue bar.

The four surplus countries together roughly mirror the U.S. deficit

• 2023: U.S. deficit 5.38% of U.S. GDP; surpluses of the other four 5.08%.
• The rule behind it: \(NX_{US} = -NX_{RoW}\). World trade balances add up to zero.
• A data lesson: the textbook’s bars are titled 2019 but match the 2017 data of PWT 10.01.

Always check which year, and which version of a dataset, a figure really shows.

Numbers: the notebook’s Fig. 3 key numbers. In 2017 (PWT 10.01) the U.S. deficit was 3.96 percent of U.S. GDP and the four others’ surpluses together 4.62 percent.

The detective story: the textbook’s figure says 2019, but its bars (U.S. −4.0, Japan 1.8, China 3.0, France −2.9, Germany 7.0) match the 2017 values of PWT 10.01 within 0.05 points. The 2019 values do not: Germany 5.3, not 7.0; China 2.1, not 3.0. Probably a figure left over from an earlier edition. And a newer version of the same table changes the numbers again: in PWT 11.0, Japan’s 2019 surplus is almost zero (0.14).

Ask the policy students: when you quote a number in a memo, how often do you check the vintage of the data?

Fact 4: deficits around the world

Are trade deficits the exception, run by a few countries like the United States, or the rule?

Ask for a guess: what fraction of the world’s economies run a trade deficit in a typical year? A quarter? Half? Three quarters?

About two in three economies run trade deficits

Data: Groningen Growth and Development Centre, Penn World Table 11.0 (csh_c, csh_i, csh_g; Feenstra, Inklaar and Timmer 2015). Map inspired by Fig. 19.3 in Jones (2024), Macroeconomics, 6th ed.

How to read it: every economy in PWT 11.0, colored by its trade balance as a percent of its own GDP. Blue is a surplus, red a deficit. The color scale stops at ±20 percent, so that a few extreme values do not wash out the rest. The play button runs the years from 1990 to 2023; the slider below the map picks one year.

Do live:

1. Press play and watch China, Germany and the oil exporters turn blue.
2. Stop at 2023 and hover over a few countries: the U.S., China, Germany, Saudi Arabia.
3. Hover over a small island economy: some PWT balances are beyond −60 percent of GDP, because their consumption and investment shares are large and poorly measured.

Many small deficits are offset by a few large surpluses

• Deficits: 113 of 182 economies in 1990, 123 of 185 in 2023.
• The surplus economies are few but large: China, Germany, the Netherlands, the oil exporters.
• In the data, the world’s balances do not add up to zero: measured in U.S. GDP they sum to +3.9% in 2023.

World trade must balance; world trade statistics do not. Measured trade has errors.

Numbers: the map’s title in the notebook (113 of 182 in 1990, 123 of 185 in 2023) and its “What to notice” (+3.9 percent of U.S. GDP in 2023).

Why the sum is not zero: exports and imports are measured by different agencies in different countries, goods in transit are counted at different dates, and the PWT balances are computed as a residual, 1 − c − i − g, so any error in the three shares ends up in the trade balance. The IMF’s world current account has the same problem.

Ask: does it matter that most countries run deficits? Not by itself: what matters is how each deficit is financed and what it pays for. That is Act II.

Why countries trade

Act II

A trade deficit means a country uses more than it produces

\[Y = C + I + G + NX, \qquad NX \equiv EX - IM\]

\[NX = Y - (C + I + G) \qquad\Longrightarrow\qquad NX < 0 \;\Longleftrightarrow\; C + I + G > Y\]

When the borrowing is repaid, the inequality must flip: for a while the country makes more than it uses, \(C + I + G < Y\).

Start from the national income identity. Why net exports and not exports? C + I + G includes goods made abroad, which are not part of domestic production, so imports are subtracted; goods made at home and sold abroad are production that appears in no domestic spending, so exports are added.

Subtract C + I + G from both sides. The sum C + I + G is domestic absorption: everything households, firms and the government use at home. A deficit means absorption exceeds production; the extra goods come from abroad.

Example from the notebook’s Check 1: Y = 100, C = 70, I = 20, G = 15. Then C + I + G = 105 > 100, and NX = −5, a deficit of 5 percent of GDP. The U.S. in 2006: 105.7 percent.

In shares of GDP: nx = 1 − c − i − g. That is how the notebook computes the trade balances of the Penn World Table in Figs. 3 and 4.

The trade deficit and foreign borrowing are the same thing, seen from two sides

\[I = \underset{\text{private saving}}{(Y - T - C)} + \underset{\text{government saving}}{(T - G)} + \underset{\text{foreign saving}}{(IM - EX)}\]

\[S \equiv (Y - T - C) + (T - G) \qquad\Longrightarrow\qquad \underset{\text{trade balance}}{NX} = \underset{\text{net capital outflow}}{S - I}\]

Goods flow in, financial claims flow out: a country with \(NX < 0\) invests more than it saves, and foreigners lend it the difference.

Derivation, in three steps (the book chapter has them in full):

1. Solve the identity for investment: I = Y − C − G − NX.
2. Subtract and add taxes T: I = (Y − T − C) + (T − G) − NX. Write −NX as IM − EX.
3. The taxes cancel inside domestic saving, S = Y − C − G, so I = S − NX, that is NX = S − I.

Every unit of investment is paid for by one of three savers: households, the government or foreigners. Net capital outflow, S − I, is what the country lends to the rest of the world, net. A deficit country receives more goods than it ships, and in exchange it sends bonds, shares or dollars. Even dollars are a claim on future U.S. goods.

The identity does not say what causes what. A spending boom at home can open a deficit; cheap credit from abroad can also feed a spending boom. The data in Act III look at which story fits.

One example: three savers pay for every unit of investment

An economy produces \(Y = 100\)	value
Consumption \(C\), investment \(I\), government purchases \(G\), taxes \(T\)	70, 20, 15, 12
Trade balance \(NX = Y - (C + I + G)\)	−5
Private saving \(Y - T - C\)	18
Government saving \(T - G\)	−3
Foreign saving \(IM - EX = -NX\)	5
Investment = 18 − 3 + 5	20
Domestic saving \(S\) and \(S - I\)	15 and −5

Each way of writing the identity gives the same deficit: 5 of the 20 units of investment are financed from abroad.

This is the notebook’s Check 1, a made-up economy. Go row by row and ask the room to compute each line before you reveal it.

The government runs a budget deficit of 3 (T − G = 12 − 15), so it absorbs 3 of the households’ 18 units of saving. Domestic saving is 15, investment 20, and the gap of 5 is filled by foreigners: the trade deficit.

Ask: if the government balanced its budget (G = 12) and nothing else changed, what would happen to the trade deficit? (With C, I and Y fixed, NX rises by 3, to −2. But “nothing else changed” is a strong assumption; next slide.)

The identity holds every year, but it does not say which term adjusts

A change of 1 point of GDP in …	holding fixed …	effect
budget deficit \(G - T\) up	private saving and \(I\)	\(NX\) down 1: twin deficits
budget deficit \(G - T\) up	private saving and \(NX\)	\(I\) down 1: crowding out at home
investment \(I\) up	\(S\)	\(NX\) down 1: foreigners finance it
private saving up	\(I\) and \(T - G\)	\(NX\) up 1: the country lends abroad

A budget deficit must be paid for by more private saving, less investment, or more borrowing abroad. The data decide which.

This is the book chapter’s comparative-statics table for NX = S − I. Each row is a statement about what the identity allows, under a “holding fixed” assumption. None of them is a prediction of behavior.

Split domestic saving into its parts: NX = (Y − T − C − I) + (T − G). If private saving minus investment stays roughly constant, the trade balance moves with the budget balance: the twin deficits of Fig. 5.

Two cases we test in Act III: China invests a lot and still runs a surplus, because it saves even more (Fig. 4); and the large U.S. budget deficits of the 1980s and 2000s came mostly with larger trade deficits, not with lower investment (Fig. 5).

Deficits add up to a foreign debt, and in present value trade must balance

\[F_t = (1 + \bar{r})\,F_{t-1} + NX_t\]

\[\sum_{t=1}^{T}\frac{NX_t}{(1 + \bar{r})^t} = -F_0\]

A country that starts with no foreign assets must match every deficit today with surpluses later, worth as much in present value.

F_t is net foreign assets at the end of year t: what residents own abroad minus what foreigners own at home. The data call it the net international investment position (Fig. 6). When F is negative, −F is the net foreign debt. The return on foreign assets is r̄.

Line 1: the current account, NX plus the income on foreign assets, is new lending to the world, so it adds to the stock. With r̄ = 0, the stock is just the starting stock plus the sum of all trade balances since: the dotted line of Fig. 6.

Line 2: divide line 1 by (1 + r̄)^t, add up from t = 1 to T, and almost every term cancels. No lender lets a debt grow forever without repayment, and no country gives goods away forever, so the present value of the final stock is zero. What is left is the country’s intertemporal budget constraint. The math is the same as the government’s budget constraint in Chapter 18, applied to the whole country.

Notebook Check 3: borrow 50 in year 1, repay 52.5 in year 2 at 5 percent; the present value of the two trade balances is exactly zero.

A steady deficit leads to a stable debt ratio if GDP grows faster than the return

\[f^* = \frac{(1 + \bar{g})\,nx}{\bar{g} - \bar{r}}\]

Deficit \(-nx\)	nominal growth \(\bar{g}\)	return \(\bar{r}\)	long-run net foreign assets \(f^*\)
3% of GDP	4%	0	−78% of GDP
3% of GDP	5%	0	−63% of GDP
3% of GDP	4%	2%	−156% of GDP

A U.S.-sized deficit of 3% a year points to a foreign debt of the order of today’s 71% of GDP.

Divide the accumulation equation by GDP, which grows at the nominal rate ḡ: f_t = [(1 + r̄)/(1 + ḡ)] f_{t−1} + nx_t. If ḡ > r̄ the coefficient is below one, so with a constant nx the ratio settles at f. Set f_t = f_{t−1} = f and solve.

Numbers: the notebook’s Check 4, which iterates the equation 1,000 years and matches the formula in all three cases: −78.0, −63.0 and −156.0 percent of GDP.

Comparative statics: a 1-point larger deficit adds (1 + ḡ)/(ḡ − r̄) = 26 points of debt in the first row; faster growth spreads the same deficit over a larger economy; a higher return adds interest to the borrowing. If r̄ ≥ ḡ, there is no stable ratio at all: the debt grows faster than the economy.

The U.S. net foreign debt in Fig. 6 is 70.9 percent of GDP in 2025, of the order of the first row.

Gains from exchange: two islands swap fish for bananas, and both eat better

Per person, each year	island 1	island 2
Endowment: bananas, fish	200, 800	800, 200
Meals without trade: \(\min(\text{bananas}, \text{fish})\)	200	200
Swap one for one	300 fish → 300 bananas	300 bananas → 300 fish
Bananas and fish after the swap	500, 500	500, 500
Meals with trade	500	500

Nothing more is produced, yet both islands gain: each good moves to the people who value it more at the margin.

The setup: two islands with the same population; people want bananas and fish in equal amounts (think of a meal as one banana with one fish); nothing is produced, each person simply receives an endowment. The numbers are the notebook’s (the textbook’s version uses 250 and 750; the logic is identical).

Island 1 swaps q fish for q bananas: 200 + q = 800 − q, so q = 300. In general, with endowments (a, b) and (b, a), the swap is (b − a)/2.

Two points to make:

1. Trade between countries works like trade between people. Inside a country we specialize and buy almost everything we consume from others; nobody wants to live like Robinson Crusoe.
2. This trade is balanced: each island ships as much as it receives every year, so NX = 0. Deficits need trade across time: the next slide.

Trade across time: each island lends in its good year and borrows in its bad year

Year	1	2	3	4	5	6
Oddtopia’s harvest	100	0	100	0	100	0
Eventopia’s harvest	0	100	0	100	0	100
Consumption, each island	50	50	50	50	50	50
Oddtopia’s trade balance \(NX = Y - C\)	+50	−50	+50	−50	+50	−50
Oddtopia’s foreign assets \(F_t\)	50	0	50	0	50	0

Trade shares the risk of a bad harvest: each island eats 50 every year, and its trade balances add up to zero.

The setup: one good, wheat, which cannot be stored; Oddtopia harvests 100 bushels in odd years and nothing in even years, Eventopia the opposite. People prefer a smooth path of consumption (diminishing marginal utility, the consumption smoothing of Chapter 16). No investment, no government, and a loan is repaid with no interest, r̄ = 0.

With I = G = 0, the identity says NX = Y − C. The world harvest is 100 every year, so each island eats 50. In odd years Oddtopia ships 50 bushels to Eventopia and gets a promise to be repaid; in even years the promise is honored. Eventopia’s row is the mirror image, so the two balances add to zero in every year.

The notebook rebuilds this table (Table 19.1 in Jones 2024) with its accounting functions and checks it against the textbook.

The point for the data: a country should borrow, and run deficits, when its income is temporarily low, when it expects to grow faster than the rest of the world, or when it has good investment projects.

A trade deficit is not a score of who is winning

A trade deficit means the country is losing at trade.

A deficit is a loan. Oddtopia runs one every year its harvest fails, and that loan is what lets it keep eating. Whether a deficit is good or bad depends on what it pays for and whether it can be repaid.

The scoreboard view of trade, exports good, imports bad, is the most common error in public debate about trade. In the national accounts a deficit is borrowing, not a loss.

When can a deficit be a problem? When it finances consumption that is not backed by future income, when the lending can stop suddenly (the sudden stops of emerging markets, Chapter 20), or when the debt grows faster than the economy.

When is it fine, or even good? When it smooths a temporary shortfall (Oddtopia), or finances investment that pays for itself, or a country expects to be much richer later.

Ask: is a student loan “losing”? Same logic, one person instead of a country.

Trade with production: the North is better at making both goods

The North makes more apples and more computers per worker than the South. Can trade still make both countries better off?

Ask for a vote before the next slides: yes, no, only the South? Many students say only the South can gain, or that the North has nothing to gain from trading with a less productive country. Collect the reasons.

The model in one sentence: two countries, two goods (apples and computers), labor is the only input, workers can switch sectors at home but cannot cross the border, and everyone spends half of income on each good.

What matters is the opportunity cost: a computer costs 10 apples in the North, 50 in the South

	North	South	North ÷ South
Workers \(L\)	100	400
Apples per worker \(x\)	160	100	1.6
Computers per worker \(z\)	16	2	8
Apples given up for one computer, \(x/z\)	10	50

The North has an absolute advantage in both goods, but a comparative advantage only in computers; the South has it in apples.

The textbook’s numbers (Table 19.2 in Jones 2024), as in the notebook.

The North leads in both goods, but by much more in computers (8 times) than in apples (1.6 times). Cross-multiply: z_n/z_s > x_n/x_s is the same as x_s/z_s > x_n/z_n. To make one more computer, the North gives up 10 apples and the South 50.

Under autarky (each country closed), both sectors must pay the same wage: a worker earns x apples in the apple sector and p z in the computer sector, so w = x and p = x/z. The price of a computer equals its opportunity cost: 10 apples in the North, 50 in the South. Each country puts half its workers in each sector.

Autarky consumption per person: the North 80 apples and 8 computers; the South 50 apples and 1 computer.

With free trade, each country makes only the good of its comparative advantage

Per person	North, autarky	North, free trade	South, autarky	South, free trade
Price of a computer (apples)	10	25	50	25
Wage (apples)	160	400	100	100
Apples	80	200	50	50
Computers	8	8	1	2

Each country gets more of the good it imports and no less of the good it makes. World output rises from 28,000 to 40,000 apples and from 1,200 to 1,600 computers.

Reveal the vote: both countries gain, the North included.

Arbitrage: under autarky a computer costs 10 apples in the North and 50 in the South, so a trader could buy computers in the North and sell them in the South. With free trade there is one world price. Guess: the North makes only computers (1,600 of them) and the South only apples (40,000).

The world price: half of world spending goes to each good, so both goods have the same total value, and p = 40,000/1,600 = 25 apples. A northern worker makes 16 computers worth 25 apples each: a wage of 400 apples. A southern worker still makes 100 apples.

Both markets clear (notebook check): computers demanded 1,600 = supplied; apples 40,000 = 40,000.

The textbook makes a point worth repeating for the South: trade “pushes” its workers out of computers into farming. Is the South worse off? No: it is cheaper to buy computers from the North at 25 apples than to make them at 50.

The world price lies between the two autarky prices

\[p = \frac{L_s\,x_s}{L_n\,z_n} = \frac{40{,}000}{1{,}600} = 25\]

\[\frac{x_s}{z_s} = 50 \;>\; p = 25 \;>\; \frac{x_n}{z_n} = 10\]

Each country buys its import at a price below its own cost of making it. That is the source of the gains.

Line 1: world income in apples is the value of everything produced, L_s x_s + p L_n z_n. Half is spent on computers, and computers bought equal computers made: p L_n z_n = ½(L_s x_s + p L_n z_n), so p = L_s x_s/(L_n z_n).

Line 2: check the guess. Northern workers stay in computers only if p z_n ≥ x_n, that is p ≥ x_n/z_n = 10. Southern workers stay in apples only if x_s ≥ p z_s, that is p ≤ x_s/z_s = 50. With 50 > 25 > 10, complete specialization is the outcome. If the South were so large that p rose above 50, southern workers would also make some computers and the South would keep its autarky price.

This is the textbook’s hard exercise in algebraic form; the book chapter derives it step by step.

Productivity gains abroad are shared through prices

A 1% rise in northern computer productivity \(z_n\)	effect
World price of a computer \(p\)	−1%
Northern wage, in apples	0
Apples per person, North and South	0
Computers per person, North and South	+1%

A better computer technology in the North makes computers cheaper everywhere, and the South gains as much as the North.

Take logs of the free-trade results: ln p = ln L_s + ln x_s − ln L_n − ln z_n, so each elasticity is a coefficient. They hold as long as the specialization condition holds.

Notebook check: raising z_n by 1 percent lowers the price by 0.99 percent (an elasticity describes very small changes) and raises computers per person by 1.00 percent in both countries; the wage and apples are unchanged.

This is the textbook’s exercise 5 (z_n from 16 to 20): the world price falls to 40,000/2,000 = 20 apples, and the condition still holds, 50 > 20 > 8.

The other rows of the book chapter’s table: a rise in southern apple productivity x_s raises p, the northern wage and southern apples; more northern workers lower the northern wage; more southern workers raise it.

Being better at everything does not remove the gains from trade

If one country is more productive in every good, it has nothing to gain from trading with the other.

Trade follows comparative advantage. The North is better at everything, yet with trade its workers eat 200 apples instead of 80, because it buys apples at 1/25 of a computer instead of making them at 1/10.

The textbook’s review question 4 asks exactly this. Absolute advantage (who makes more per worker) decides where incomes are high. Comparative advantage (who gives up less of the other good) decides who exports what.

An everyday version: a lawyer who types faster than her assistant still hires the assistant, because an hour of her time is worth more in court.

The opposite mistake is just as common: “a poor country cannot compete with a rich one”. The South also gains (2 computers instead of 1), because it has a comparative advantage in apples.

Free migration follows absolute advantage, and the gains go to the migrants

Apples and computers for one worker	autarky	free trade	free migration
Born in the North	80 and 8	200 and 8	80 and 8
Born in the South	50 and 1	50 and 2	80 and 8

With migration all 500 workers use the North’s technology: the world makes the same 40,000 apples and 4,000 computers instead of 1,600.

Now let workers move instead of goods. Technologies stay where they are, and production has constant returns, so output per worker does not depend on how many workers a country has.

The northern wage under free trade is 400 apples, four times the southern 100. Since the North is more productive in both goods, a worker makes more of either good there, and the South empties out. The world becomes the North under autarky with 500 workers: w = 160, p = 10, everybody eats 80 apples and has 8 computers (Table 19.5 in Jones 2024, recomputed in the notebook).

Northerners are back at their autarky bundle: the newcomers do not change their productivity. So northerners prefer free trade (200 apples) to free migration (80 apples).

The link to growth chapters: poor countries are poor mostly because of low total factor productivity (Chapters 4 and 5). Moving capital to a low-productivity place leaves the problem in place; moving workers to where productivity is high attacks it directly.

The winners from migration could compensate the losers and still gain

• From free trade to free migration, each of the 100 northerners loses 120 apples: 12,000 in all.
• Each of the 400 migrants gains 30 apples and 6 computers: 12,000 apples and 2,400 computers in all.
• A fee of 30 apples per migrant gives each northerner back exactly 200 apples and 8 computers; each migrant still has 50 apples and 8 computers, four times the computers of free trade.

When the gains are larger than the losses, a transfer can make everyone better off. In practice, the transfer is the hard part.

Numbers: the notebook’s compensation check (apples eaten 40,000 = apples produced 40,000). This is the textbook’s exercise on an entrance fee.

The same logic applies to trade in goods. In the model, apple growers in the North become computer makers overnight and nobody loses. In reality, switching jobs takes time and new skills, so trade creates winners and losers inside each country. The winners could, in principle, compensate the losers through retraining and a social safety net. Whether they actually do is a policy question: Act III.

Deficits, debt and policy

Act III

Test 1: do fast-growing countries borrow?

Consumption smoothing says that a country expecting to be much richer tomorrow should borrow today. Do the fastest-growing economies run trade deficits?

Predict for China, India, Singapore, Ireland and South Korea, 2000–2023: how many of the five ran trade deficits on average? Write down a number from 0 to 5.

The idea comes from Oddtopia and from the permanent-income view of consumption (Chapter 16): a student who expects a high income later borrows today. A country that expects rapid growth should do the same, and run trade deficits.

Collect predictions by show of hands: how many say 4 or 5 deficits? How many say 0 or 1?

Four of the five fast growers ran trade surpluses, not deficits

Data: Groningen Growth and Development Centre, Penn World Table 11.0 (csh_c, csh_i, csh_g; Feenstra, Inklaar and Timmer 2015). Chart inspired by Fig. 19.4 in Jones (2024), Macroeconomics, 6th ed.

How to read it: each bar is the simple average of a country’s yearly trade balance, as a percent of its own GDP, from 2000 to the last year chosen on the slider. The title counts the surplus countries.

Do live:

1. Start at 2023: 4 of 5 economies ran surpluses on average. Only India ran a deficit.
2. Move the last year to 2017: this is the window that reproduces the textbook’s bars.
3. Point at Singapore and Ireland: very large averages, very sensitive to the window (next slide).

The fast growers lent to the world, the opposite of what smoothing predicts

• 2000–2023: 4 of 5 ran surpluses; India is the only deficit country in every window.
• China invests a lot, and saves even more: \(S > I\), so \(NX > 0\).
• Perhaps causality runs the other way: countries that push their firms to export may grow faster.
• Singapore’s average falls from 19.3% to 10.6% if the window starts in 1990.

A single average can hide big swings. Before you trust it, look at the years behind it.

Reveal the predictions: most rooms predict several deficits; the answer is one.

Numbers: the notebook’s Fig. 4 prose and key numbers. The textbook’s title says 2000–2019 and its text 1990–2019, but only the window 2000–2017 reproduces its bars within 0.05 points (China 2.9, India −0.4, Singapore 16.1, Ireland 22.8, South Korea 3.5). The 1990–2019 window would give Singapore 7.6.

Why the swings (fig. 4b in the book chapter, left out here): Singapore’s balance jumps from −33 percent of GDP in 1993 to +15 percent in 1998; it is a trading hub whose exports and imports were each two to three times its GDP, so its balance is a small difference between two huge numbers. Ireland’s swings from 32 percent in 2018 to 7 percent in 2019 and 50 percent in 2022, because multinationals book much of their production and profits there.

The textbook’s alternative story: export promotion, with subsidies to exporters, could produce both fast growth and a trade surplus. The data here cannot separate the two stories.

Test 1, again: the textbook picked five countries

If we look at every economy, not just five hand-picked ones, do faster growers run smaller or larger trade balances?

A fair test uses all economies. Ask: will the fitted line slope up (fast growers lend) or down (fast growers borrow, as smoothing predicts)?

Across 176 economies, faster growth goes with slightly smaller trade balances

Data: Groningen Growth and Development Centre, Penn World Table 11.0 (csh_c, csh_i, csh_g, rgdpna, pop; Feenstra, Inklaar and Timmer 2015). Chart inspired by Fig. 19.4 and Chapter 19 of Jones (2024), Macroeconomics, 6th ed.

How to read it: one dot per economy. Horizontal axis: average annual growth of real GDP per person, 2000–2023. Vertical axis: the average trade balance over the same years, percent of GDP. The textbook’s five are labeled in green; the line is an ordinary least squares fit over all economies.

Data choice to mention: six tiny island and financial economies (Bermuda, Anguilla, Barbados, Montserrat, St. Kitts and Nevis, Turks and Caicos) are set aside, because their PWT “balances” of −40 to −2,200 percent of GDP are measurement problems, not trade deficits.

Do live: hover over the textbook’s five, then over the fast growers with deficits: Ethiopia, Cambodia, Armenia.

The smoothing prediction holds weakly; the textbook’s five are not typical

• The fitted line slopes down: −1.5 points of trade balance per point of faster growth.
• But the link is weak: a correlation of −0.22.
• Of the 28 economies that grew faster than 4% a year, only 5 ran surpluses on average.

The textbook’s puzzle is mostly about East Asian exporters and Ireland. A conclusion from five hand-picked countries can change when you look at all of them.

Numbers: the scatter’s title (176 economies, slope −1.5) and the notebook’s printed correlation (−0.22) and “What to notice” (28 fast growers, 5 surpluses).

Many of the fast growers with deficits are poor economies that borrowed or received aid: Ethiopia, Cambodia, Armenia. That fits the smoothing story better.

Caveat for the room: this is a correlation across countries, not a causal estimate. Growth and the trade balance both depend on saving, investment, aid, oil prices and policy.

Test 2: the twin deficits

When the U.S. budget deficit jumped in the 1980s, what paid for the extra government borrowing?

Predict: from 1979 to 1986, did U.S. investment fall by as much as the budget deficit rose, or did the trade deficit rise instead?

Recall the identity table of Act II: a higher budget deficit must be matched by more private saving, less investment (crowding out at home) or more borrowing abroad (a larger trade deficit). Ask the room to pick one before the chart.

Twice, a rising U.S. budget deficit came with a rising trade deficit

Data: U.S. Bureau of Economic Analysis, National Income and Product Accounts, via FRED (GPDIA, FGDEF, GDP, A019RC1A027NBEA, GDPA). Chart inspired by Fig. 19.5 in Jones (2024), Macroeconomics, 6th ed.

How to read it: four lines, each a percent of GDP. Private investment, the federal budget deficit, the trade deficit, and, dotted, domestic saving S = I + NX. The gap between saving and investment is exactly the trade deficit. The slider picks an episode, shaded; the title reports how much each line changed from its first to its last year.

Do live:

1. “1980s: 1979 to 1986”: budget deficit +2.9, trade deficit +2.0, investment −2.0 points.
2. “2000s: 2000 to 2006”: budget deficit +3.2, trade deficit +2.0, investment −0.3.
3. “Great Recession: 2007 to 2010”: the twins split.
4. “Covid-19: 2019 to 2021”: the budget deficit jumps by more than 7 points.

Click “Domestic saving” in the legend to hide it.

In the 1980s and 2000s foreigners financed much of the budget deficit; in recessions the twins split

• 1979→1986: budget deficit +2.9, trade deficit +2.0, investment −2.0 points; 2000→2006: +3.2, +2.0 and −0.3.
• 2007→2010: the budget deficit soared, investment collapsed, and the trade deficit fell.
• Domestic saving drifted from about 17% of GDP in the 1960s–70s to 13–15% since 2000; the trade deficit filled the gap.

Twin deficits are a tendency, not a law: what private saving and investment do at the same time decides it.

Reveal the prediction: in both episodes investment fell by less than the budget deficit rose, and the trade deficit took up much of the gap.

Numbers: the plot titles for each episode and the notebook’s decade averages. Compared with the 1970s, the 1980s had higher budget deficits (4.0 against 3.5 percent of GDP) and much higher trade deficits (1.75 against 0.18), with no fall in investment (18.5 against 18.0).

Why the twins split in recessions: tax revenue falls and spending on unemployment insurance rises (the budget deficit grows), while investment and imports collapse together (the trade deficit shrinks). In the Covid-19 years the budget deficit rose by more than 7 points and the trade deficit by less than 1, because private saving soared.

Test 2, again: twin deficits beyond the United States

Do large budget deficits come with large trade deficits in other countries too?

Ask the room to name a country where they expect both deficits to move together. Greece is a common guess, for good reason.

In other countries the twins are sometimes close, sometimes opposites

Data: World Bank, World Development Indicators (NE.GDI.TOTL.ZS, NE.RSB.GNFS.ZS); IMF, World Economic Outlook, October 2026 (GGXCNL_NGDP). Chart inspired by Fig. 19.5 in Jones (2024), Macroeconomics, 6th ed.

How to read it: for one economy at a time (the menu has the G20 economies), three lines in percent of GDP: total investment (World Bank, including government investment), the general-government budget deficit (IMF, federal plus state and local), and the trade deficit (World Bank). The title reports the correlation of the two deficits, from −1 to +1.

Definitions differ from Fig. 5: total investment is about 4 points higher than private investment, and the general-government deficit about 1 point higher than the federal one. The trade deficits agree within 0.1 point.

Do live: start with the U.S., then Germany, Japan, the United Kingdom and Australia. (Greece is not in the G20 menu; its correlation is in the book chapter.)

The twin-deficit link is clear in Germany and Greece, and reversed in the United States since 2001

• Correlation of the two deficits: Germany +0.57, Greece +0.56, Japan +0.31.
• U.S. (general government, 2001–2024): −0.36; Australia −0.55.
• In the U.S. the largest budget deficits came in the recessions of 2009 and 2020, when the trade deficit shrank.

Over long periods the “twins” are only loosely related. The identity always holds; the correlation does not.

Numbers: the notebook’s twin-deficit correlations (U.S. −0.36, Germany 0.57, Japan 0.31, Greece 0.56, United Kingdom −0.17, Australia −0.55).

Greece and Germany: both deficits rose together before the euro crisis and fell together after it, in Greece through a painful adjustment.

Lesson for policy memos: “cutting the budget deficit will cut the trade deficit” is true only if private saving and investment do not move in the opposite direction. In a recession they usually do.

Test 3: the foreign debt

After 50 years of deficits, does the United States owe the rest of the world more than it owns abroad, and when did that start?

Predict the first year in which the U.S. became a net debtor, and its net foreign debt today, as a percent of GDP.

Recall the accumulation equation: each year’s deficit is new borrowing, so the net position should fall by about the deficit every year. Ask for a year (1976? the 1980s? the 2000s?) and a number (10 percent of GDP? 50? 100?).

The United States turned net debtor in 1989; its net foreign debt is now about 71% of GDP

Data: U.S. Bureau of Economic Analysis, International Investment Position and NIPA, via FRED (IIPUSNETIA, GDPA, A019RC1A027NBEA) and ALFRED (July 2023 vintages). Chart inspired by Fig. 19.6 in Jones (2024), Macroeconomics, 6th ed.

How to read it: the U.S. net international investment position, what U.S. residents own abroad minus what foreigners own in the U.S., as a percent of GDP, at the end of each year. Three lines:

• solid: the current data;
• dashed: the same series as published in July 2023, the vintage the textbook used;
• dotted: the 1976 position plus the sum of all later trade balances, the accumulation equation with r̄ = 0.

Point at the zero line: above it the U.S. is a net creditor, below it a net debtor. Hover over 1988 and 1989, then over 2021 and 2025.

Past deficits explain the trend of the foreign debt, but not every year

• Last year as a net creditor: 1988. In 2025: a net foreign debt of 70.9% of GDP.
• The summed deficits (dotted) follow the same downward trend, but the gap reached 37 points of GDP in 2010.
• Revisions matter: 2022 was −63.5% in the textbook’s vintage, −54.6% in the current data.

The textbook’s “above 60 percent in 2022” was true when it was written; in today’s data it is true for 2021 and 2023–2025.

Reveal the predictions: the turn came in 1989, after more than a decade of deficits had used up the U.S. creditor position of the 1970s (+10.4 percent of GDP in 1980).

Numbers: the notebook’s Fig. 6 key numbers. BEA revised the 2021 position by +3.43 trillion dollars; the current data are 9 to 16 points of GDP less negative for 2020–2022, and the deepest point is now 2024 (−75.3 percent). Years below −60 percent in current data: 2021, 2023, 2024, 2025.

Why the solid and dotted lines differ: the position also changes when asset prices and the dollar move, and with the income earned on foreign assets. Until 2020 these effects kept the debt below the summed deficits; in 2021 and since 2023 it is above them.

Is 71 percent of GDP a lot? Recall the steady-state formula: a 3 percent deficit with 4 percent nominal growth points to 78 percent. The Devil’s advocate returns to this.

The foreign debt is more than the sum of past deficits

The net foreign debt is just the sum of all past trade deficits.

From 1976 to 2025, U.S. trade deficits added up to $18.0 trillion, but the net position fell by $22.0 trillion. The rest comes from changes in the value of assets: stock prices, the dollar, and the income they earn.

Numbers: the notebook’s last Fig. 6 key number (“1976 to 2025: position −22.0 trillion dollars; sum of trade balances −18.0 trillion”).

The mechanism: U.S. residents hold many foreign shares and direct investments, often in foreign currencies; foreigners hold many U.S. bonds in dollars. When foreign stock markets rise or the dollar falls, U.S. assets abroad gain value and the debt shrinks; when U.S. stocks boom, as in the 2010s and 2020s, foreigners’ holdings of U.S. shares gain value and the debt grows.

Gourinchas and Rey (2007) call the U.S. the world’s venture capitalist: it borrows in safe dollar bonds and invests abroad in riskier, higher-return assets, which for decades earned it a positive return on a negative position. Whether that “exorbitant privilege” lasts is debated.

Creditors and debtors around the world

Which countries are the world’s great creditors, and is the United States the world’s largest debtor?

Ask for guesses: who owns the most abroad relative to their economy? Students usually say China or Saudi Arabia. And is the U.S. debt large compared with other countries’ debts, as a share of GDP?

The great creditors ran surpluses for decades; the U.S. is the largest debtor only in dollars

Data: Philip R. Lane and Gian Maria Milesi-Ferretti, External Wealth of Nations database, Brookings, February 2026 release (Lane and Milesi-Ferretti 2018). Chart inspired by Fig. 19.6 in Jones (2024), Macroeconomics, 6th ed.

How to read it: net foreign assets as a percent of GDP, 1970–2024, for one group of economies at a time; the menu picks the group (the textbook’s country, the G7, large emerging economies, the World Bank regions). Click a name in the legend to hide it; double-click the chart to show the extreme positions of a few financial centers and oil exporters, which the chosen range leaves out.

Do live: start with the G7 (Japan and Germany high above zero, the U.S. far below), then “Large emerging”, then Europe.

Data caveat: up to 2019 this database copies the BEA’s U.S. numbers; from 2020 it keeps BEA values from before the later revisions, so its U.S. position is 7 to 15 points of GDP more negative than the current BEA data (−90.6 against −75.3 percent in 2024).

Most economies are net debtors; the creditors saved for decades

• 2024: 137 of 196 economies are net debtors.
• Creditors: Norway +358% of GDP (its oil fund), Switzerland +122%, Japan +84%, Germany +77%.
• Debtors: the U.S. owes the most in dollars, about $27 trillion, but Greece’s debt is larger as a share of GDP: −132%.

Today’s creditors are yesterday’s surplus countries: the stock of foreign assets is the memory of past trade balances.

Numbers: the notebook’s 2024 External Wealth of Nations table (Norway 357.8, Switzerland 122.3, Japan 84.4, Germany 76.6, China 17.6, United Kingdom −5.0, Ireland −73.9, U.S. −90.6, Greece −131.6 percent of GDP; 137 of 196 debtors; U.S. 27 trillion dollars).

The textbook’s point: there is no magic level at which a foreign debt triggers a crisis. Australia’s net foreign debt has been above 50 percent of GDP for decades without a crisis. Small financial centers such as Ireland have huge gross positions, so their net positions swing a lot.

China’s net position, +17.6 percent of GDP, is smaller than its long surpluses suggest, partly because foreign firms own much direct investment in China and partly because of valuation changes.

A tariff cannot close a trade deficit that saving and investment decide

Governments often raise tariffs to cut a trade deficit. Will it work, and who pays?

What the identity says

• \(NX = S - I\): a tariff narrows the deficit only if it raises saving or lowers investment.
• Fewer imports tend to mean fewer exports: a stronger currency, retaliation.

What the evidence shows

• The 2018–19 U.S. tariffs were passed almost fully into U.S. import prices.
• Retaliation hit U.S. farm exports; the net welfare cost was small, the redistribution large.

The identity first: NX = S − I holds whatever trade policy does. A tariff changes what is imported and who pays more, but the trade balance moves only if national saving or investment moves. Most economists expect a tariff to leave the overall balance roughly unchanged (bilateral balances can shift a lot: trade diverts to other suppliers). Chapter 20 adds the exchange rate, the main channel through which fewer imports become fewer exports.

Evidence on the 2018–19 U.S. tariffs: Amiti, Redding and Weinstein (2019, Journal of Economic Perspectives) and Fajgelbaum, Goldberg, Kennedy and Khandelwal (2020, Quarterly Journal of Economics) find near-complete pass-through of the tariffs to the prices paid by U.S. importers and consumers; foreign exporters did not absorb them. Fajgelbaum et al. estimate a small aggregate loss once tariff revenue and gains to protected producers are counted, with large transfers from buyers of imports to protected producers and the government, and losses for farm sectors hit by retaliation.

Present as contested: some argue tariffs can protect strategic industries or win concessions in negotiations; those are arguments about the composition of trade, not about the trade balance. Our notebook data do not identify the effect of any tariff.

The gains from trade are spread thin; the losses are concentrated

Trade raises a country’s income on average, yet some workers and towns lose a lot. What should policy do for them?

What the model predicts

• Gains exceed losses, so the winners could compensate the losers.
• Workers switch sectors overnight, at no cost.

What it leaves out

• Displaced workers move slowly; local jobs and wages fall for years.
• Compensation is possible, but rarely paid in full.

The model’s promise: the compensation logic of the migration slide applies to trade too. If the winners’ gains exceed the losers’ losses, a transfer can leave everyone better off.

The evidence on the losses: Kletzer (2001, Institute for International Economics) estimates that millions of U.S. manufacturing workers lost jobs to import competition from 1979 to 2001, and that many earned less after re-employment. Autor, Dorn and Hanson (2013, American Economic Review) find that rising imports from China explain about a quarter of the decline in U.S. manufacturing employment from 1990 to 2007, with lasting falls in employment and wages in the most exposed local labor markets; Autor, Dorn and Hanson (2016, Annual Review of Economics) show that the adjustment was slow. (Chapter 7 discussed the same China shock from the labor-market side.)

The policy tools: Trade Adjustment Assistance in the U.S. (retraining, income support, wage insurance for older workers), unemployment insurance, place-based policies. Hyman (2018, working paper) finds that TAA training raised the earnings of displaced workers over the following decade, but the program is small and take-up low. How to design compensation well is, as the textbook says, not well understood. Ask the policy students: why is compensation so rarely paid even when the gains are large? (Losers are concentrated and visible; winners are dispersed; transfers cost money and political capital.)

Free migration could raise world income more than free trade

Wages for the same worker differ several-fold across borders. Should rich countries let more workers in, and how could natives share the gains?

What the model predicts

• Workers move to high productivity: world output rises.
• Migrants gain the most; natives can be compensated.

What is debated

• Effects on native wages: small on average, debated for some groups.
• Fiscal, social and political costs the model ignores.

The model’s prediction: migration follows absolute advantage, and in the North–South example world computer output rises from 1,600 to 4,000.

The evidence on the gains: Clemens (2011, Journal of Economic Perspectives) surveys estimates that removing barriers to migration could raise world GDP by very large amounts, far more than removing the remaining barriers to trade in goods: “trillion-dollar bills on the sidewalk”. Clemens, Montenegro and Pritchett (2019, Review of Economics and Statistics) estimate the “place premium”: the same worker, with the same skills, earns several times more in the U.S. than in his or her home country.

The contested part: the effect on native workers. Card (1990, Industrial and Labor Relations Review) found no measurable effect of the 1980 Mariel boatlift on wages in Miami; Borjas (2017, ILR Review) re-analyzed the same episode and found large wage losses for low-skilled native men; Peri and Yasenov (2019, Journal of Human Resources) used another method and found no significant effect. Most studies find small average effects, but the debate for specific groups is open.

The compensation idea of the textbook’s exercise (an entrance fee) has real-world cousins: visa fees, points systems, temporary-worker programs. Ask: which costs does the model leave out that voters care about?

“Fifty years of deficits prove that trade never has to balance”

A skeptic says: “The U.S. has borrowed from the world every year since 1976 and nothing bad happened. The rule that trade must balance in present value is empty.”

Reply: the rule is about present values, not years. With nominal GDP growing 4% and no net return, a steady deficit of 3% of GDP stabilizes the foreign debt at 78% of GDP, close to today’s 71%. That is sustainable only while growth beats the return: at a 2% return, the same deficit implies 156%.

Take the objection seriously. Fifty years is a long time, the U.S. borrows in its own currency, and the dollar is the world’s reserve asset, so foreigners want to hold dollar claims. The U.S. has even earned more on its foreign assets than it paid on its debts (the valuation effects of the myth slide).

But a steady deficit is not a free lunch. The budget constraint says the debt must not grow faster than the economy forever. The steady-state formula, f* = (1 + ḡ) nx/(ḡ − r̄), shows that a constant deficit is consistent with a stable debt ratio only when ḡ > r̄. The numbers are the notebook’s Check 4 (−78, −63 and −156 percent).

What would end it? A rise in the return foreigners demand, slower growth, or a loss of the dollar’s special role. Economists are divided on whether the adjustment, when it comes, will be gradual or sudden: the textbook says a minority fears a sudden stop. Chapter 20 studies the adjustment with the exchange rate.

Ask the room: what would you watch to know whether the U.S. foreign debt is becoming a problem?

What to remember from this chapter

• U.S. trade has tripled as a share of GDP since 1950, and imports have exceeded exports every year since 1976.
• A trade deficit is borrowing: \(NX = S - I\). Deficits add up to a foreign debt, and in present value trade must balance.
• Trade follows comparative advantage and can make every country better off; migration follows absolute advantage.
• Fast growers lend rather than borrow, twin deficits are a tendency, and the U.S. foreign debt is about 71% of GDP.
• The gains from trade exceed the losses, but the losers are concentrated; compensating them is the policy problem.

Ask each student to write one sentence they could say to a friend who thinks trade deficits mean a country is losing. Then one number from today they will remember.

Walk the three branches of the mind map in about a minute each: the facts of trade (cyan), why countries trade (lavender), and deficits, debt and policy (green). Click the image to zoom in.

A trade deficit is borrowing, repaid in present value; trade by comparative advantage can make every country better off, though not every worker

Next: Chapter 20, Exchange Rates and International Finance

Chapter 20 brings trade into the short-run model: the exchange rate, how it moves net exports, and how a country adjusts when foreign lending stops.

Sources: data and figures

• Figs. 1 and 2, U.S. exports, imports and the trade balance. BEA, National Income and Product Accounts, via FRED: EXPGSA, IMPGSA, GDPA, A019RC1A027NBEA; openness ranking: World Bank WDI (NE.EXP.GNFS.ZS, NE.IMP.GNFS.ZS). Inspired by Figs. 19.1 and 19.2 in Jones (2024).
• Figs. 3 and 4, the trade balance around the world and in fast growers; the map and the scatter. Penn World Table 11.0 (doi:10.34894/FABVLR) and 10.01; Feenstra, R., R. Inklaar and M. Timmer (2015), American Economic Review 105(10). Inspired by Figs. 19.3 and 19.4 in Jones (2024).
• Fig. 5, the twin deficits. BEA via FRED: GPDIA, FGDEF, GDP, A019RC1A027NBEA; World Bank WDI (NE.GDI.TOTL.ZS, NE.RSB.GNFS.ZS); IMF World Economic Outlook, October 2026 (GGXCNL_NGDP). Inspired by Fig. 19.5 in Jones (2024).
• Fig. 6, net foreign assets. BEA via FRED and ALFRED: IIPUSNETIA, GDPA; Lane, P. and G. M. Milesi-Ferretti, External Wealth of Nations database, February 2026 release (Lane and Milesi-Ferretti 2018, IMF Economic Review 66(1)). Inspired by Fig. 19.6 in Jones (2024).
• Worked economies. Islands, Oddtopia and Eventopia, North and South, and free migration: Sections 19.3–19.6 and Tables 19.1–19.5 in Jones (2024), recomputed in the book chapter.
• Textbook. Jones, C. I. (2024). Macroeconomics, 6th ed. W. W. Norton. Book chapter, with the data, code and every figure: Data Science and Macroeconomic Models, Chapter 19.

Sources: research cited

• Tariffs. Amiti, M., S. Redding and D. Weinstein (2019), Journal of Economic Perspectives 33(4); Fajgelbaum, P., P. Goldberg, P. Kennedy and A. Khandelwal (2020), Quarterly Journal of Economics 135(1).
• The losers from trade. Kletzer, L. (2001), Job Loss from Imports: Measuring the Costs, Institute for International Economics; Autor, D., D. Dorn and G. Hanson (2013), American Economic Review 103(6); Autor, D., D. Dorn and G. Hanson (2016), Annual Review of Economics 8; Hyman, B. (2018), “Can Displaced Labor Be Retrained? Evidence from Quasi-Random Assignment to Trade Adjustment Assistance”, working paper.
• Migration. Clemens, M. (2011), Journal of Economic Perspectives 25(3); Clemens, M., C. Montenegro and L. Pritchett (2019), Review of Economics and Statistics 101(2); Card, D. (1990), Industrial and Labor Relations Review 43(2); Borjas, G. (2017), ILR Review 70(5); Peri, G. and V. Yasenov (2019), Journal of Human Resources 54(2).
• The foreign debt. Gourinchas, P.-O. and H. Rey (2007), “From World Banker to World Venture Capitalist”, in R. Clarida (ed.), G7 Current Account Imbalances, University of Chicago Press.