Tuesday, October 11, 2005

Katrina Likely to Reduce U.S. Trade Deficit

The U.K. goods & services trade deficit expanded sharply in August, from £3.9 billion ( $6.8 billion )in July to £5.3 billion ( $9.3 billion ) in August. Yet the entire increase seems to be attributable to a £1.4 billion ($2.5 billion)insurance claim that Katrina victims is likely to claim from Lloyd's of London. But if the U.K. trade balance is weakened by $2.5 billion due to Katrina, then the U.S. trade balance will be strengthened by the same amount. Indeed it could be even higher if Katrina victims can claim money from insurance companies in other countries too. Month-to month fluctuations in the U.S. trade balance is extremely difficult to predict since it is so volatile, but this factor means that a decline in the deficit is more likely than a increase.

Interestingly, this means also that GDP is likely higher due to the damages since the insurance claims is counted as a positive to GDP while the damages themselves are not counted as a negative (It is however counted as a negative with regards to national income where capital consumption is deducted ).


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