Tuesday, February 07, 2012

Why The Effects On The U.S. Of A European Slump Goes Beyond Exporrs

Paul Krugman notes that only about 2% of America's GDP consists of goods exports to Europe and argues that even after increasing that number by 25% (to 2.5% of GDP) ta take service exports into account that means that there is little reason to expect a downturn in the European economy to affect the U.S. economy.

But first of all, while no country or region specific data for service exports exists, total service exports is more like 40% of goods exports as goods exports was $126.6 billion while service exports was $51.3 billion. America's exports consists of services to a much higher extent than most other countries (with some exceptions like Britain and Hong Kong).

Still, with a 2.8% of GDP estimate for total exports, even a 25% decline in exports would at most reduce GDP by only 0.7%, less to the extent that the value of exported goods consists of imported input goods.

However, while America because of its size is less sensitive to developments in Europe, and other parts of the world, than most other countries, a severe recession in Europe would affect it beyong the direct effect on exports to Europe for two reasons.

One is that because other countries in the world also export to Europe, their economies will weaken too, weakening U.S. exports to those countries as well.

The second, and more important is the effect that globalized financial markets create. When there is panic in one market, other markets usually panic as well. Europe experienced that in 2008 after the Lehman meltdown. And if there is a similar meltdown now in Europe, America will experience it too.


Blogger Shane Leavy said...

I wonder do you have any thoughts on the effects a Chinese economic crisis would have on the developed world? Since some "Western" commentators have been debating a lot about the future success or failure of China, this seems to be an important topic. Are we so interdependent that decline in China - even while some see it as a strategic rival - would have big negative economic consequences in North America or Europe?

7:09 PM  

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