Edward Conard

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  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
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Upside of Inequality Oxford Unintended Consequences

AI Summary. Trade balances explain only a fraction of changes in countries' net international investment positions, with financial flows, valuation effects, and measurement errors often driving larger shifts than the underlying surpluses or deficits.

Stefan Avdjiev, Kristin Forbes, Tsvetelina Nenova and Marjorie Santos Massachusetts Institute of Technology
Date Posted:
Is Database:
Database

Avdjiev, et al decompose the changes in countries’ net international investment positions into the effect of accumulated trade flows, net investment income, and asset revaluation. For the US, only ⅓ of the NIIP deterioration was due to trade flows.

Do trade balances actually drive countries' international investment positions?

Core argument: Unraveling the Cobweb of Global Imbalances: Drivers, Vulnerabilities, and Adjustment Scenarios*.

Figure 8 shows accumulated trade flows over 2010-24 (as a share of 2024 GDP) for each of the 28 countries in our sample (plus the euro area as one entity) in blue bars, with the corresponding changes in NIIPs (from Figure 5) in black squares. For a few countries (such as Germany and France), changes in NIIPs largely correspond to accumulated trade surpluses or deficits. However, in most cases, trade flows are only weakly correlated with these changes in imbalances. In the United States, trade deficits contributed to only about one-third of the deterioration in its NIIP, and in Canada, the striking improvement of 73pp in its NIIP (relative to 2024 GDP) entirely reflected financial effects, as accumulated trade balances alone would have generated an NIIP deficit. In other countries, accumulated trade flows would have generated much larger changes in imbalances than actually occurred if they were not offset by financial channels working in the opposite direction. For example, in China, accumulated trade surpluses would have improved the NIIP by 24% of 2024 GDP, rather than the reported 10% (with the difference primarily explained by financial losses and unexplained errors and omissions).

Takeaways by Macro Roundup® AI

  1. Unraveling the Cobweb of Global Imbalances: Drivers, Vulnerabilities, and Adjustment Scenarios*.
  2. Figure 8 shows accumulated trade flows over 2010-24 (as a share of 2024 GDP) for each of the 28 countries.
  3. For a few countries (such as Germany and France), changes in NIIPs largely correspond to accumulated trade surpluses or deficits.

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