I am in the process of reading "Not a Zero Sum Game", and in the book Ayau makes the argument that "No matter what he produces, every exporter ends up with foreign currency as his final product." I feel like this is incorrect.
Essentially, the local exporter sells his product in a foreign country, and gets a foreign currency--but he must pay the costs of production with local currency. So, he sells the foreign currency to local importers who demand the foreign currency to buy foreign exports. That is where I get confused. If importers are buying foreign currency to buy foreign products, that means that foreign exporters will be paid not in the local currency of the importers but in their own local currency (which is the foreign currency the importers bought). So the exporter in the other country is paid not in foreign currency, but in his own local currency. That makes the entire argument seem false, but I feel like I am missing something.
If importers buy foreign currency to obtain foreign goods, that means that foreign exporters will be paid in their own local currency for their products. Does my confusion have something to do with not understanding balance of payments/trade? If anybody could clarify I would appreciate it.
I am not understanding quite what you're saying so here is a basic representation of how it work.
Country A buys goods from Country B. Company from country B will exchange this money with country B firms for the currency of country B to pay workers costs ECT. Then the firms of country B will take the newly gotten currency of country A and exchange it for goods in country A,
Cycle repeats
Money goes like this
A to B1 to B2 to A.
Where A is the intially importing nation, B1 is the exporting firm and B2 are the importing firms of country B.
I'm sorry if I didn't fully understand your question.
tcostel: I am in the process of reading "Not a Zero Sum Game", and in the book Ayau makes the argument that "No matter what he produces, every exporter ends up with foreign currency as his final product." I feel like this is incorrect.
I'm not familiar with the book, so I don't have any context. But it is true that every exporter would be ultimately paid in their own local currency.
Thanks for trying to help, and sorry if I am not clear. I probably sound confusing because I am overlooking something really simple.
So country A buys from B using A currency. B then gets the A currency and sells it so it can get B currency to pay for its own local costs. I understand this part. But the cycle part is what confuses me. The buyers of A currency use it to buy goods from country A. They would be using A currency to buy goods from country A, so country A would get paid in its own local currency. Therefore, country A would not need to exchange any currencies to pay local costs, so it doesn't seem to balance out to me. On the one hand, country A is using currency A to buy from B. But on the other, country B is using currency A to buy from A. Nobody is using currency B for international trade, so the cycle is missing something. What am I missing? I hope this makes more sense, and thanks for bearing with me.
Here is the context of my confusion:
No matter what he produces, every exporter ends up with foreign currency as his final product . . . However, to cover his local production costs, he will need local currency. So he sells his foreign currency in the exchange market to local importers. In this very real sense, all exporters' markets are domestic, because they all sell their final product (foreign currency) in the local market. Thus, the higher the price of foreign currency, the greater the exporter's income.
However, the country A exporter from above is being paid in its own dollars, so foreign currency is not a product at all. The foreign currency seems out of the equation in one country, but relevant in the other. That seems wrong in my mind; I just need to find the missing piece of logic.
When an American importer wants to buy Japanese computers, he can either pay them in Dollars or Yen, or both or something else. It's realy up to them to arrange the deal. Both companies will know the exchange rate of those currencies, so the Japanese company will know what a Dollar will be worth to them in Yen and vice versa. It doesn't matter which side exchanges the currency, since the exchange rate wil be the same for either one.
tcostel: Therefore, country A would not need to exchange any currencies to pay local costs, so it doesn't seem to balance out to me. On the one hand, country A is using currency A to buy from B. But on the other, country B is using currency A to buy from A. Nobody is using currency B for international trade, so the cycle is missing something. What am I missing?
Therefore, country A would not need to exchange any currencies to pay local costs, so it doesn't seem to balance out to me. On the one hand, country A is using currency A to buy from B. But on the other, country B is using currency A to buy from A. Nobody is using currency B for international trade, so the cycle is missing something. What am I missing?
Let me understand your scenario. There is no currency exchange by Country A, since it exports and imports in its own domestic currency, while Country B exports and imports with the foreign currency from Country A.
For this to work, Country B must bear the exclusive burden of exchanging currencies, while Country A does none of the exchange itself.
Exporter from Country B accepts payment in foreign currency, but needs domestic currency.
Exporter sells foreign currency to Importer (in Country B) from whom it buys the domestic currency. Importer then makes payment in foreign currency to Country A. Therefore all exchange is done within Country B, and none within Country A.
Let me understand your scenario. There is no currency exchange by Country A, since it exports and imports in its own domestic currency, while Country B exports and imports with the foreign currency from Country A. For this to work, Country B must bear the exclusive burden of exchanging currencies, while Country A does none of the exchange itself. Exporter from Country B accepts payment in foreign currency, but needs domestic currency. Exporter sells foreign currency to Importer (in Country B) from whom it buys the domestic currency. Importer then makes payment in foreign currency to Country A. Therefore all exchange is done within Country B, and none within Country A.
Yes, exactly. Where the conufusion lies is how that ties into the argument made in the book. For example, he argues the purpose of exporting is to be able to import, but that does not seem to be the case for country A because it never accumulates dollars from country B using the model set up in the book. A foreign currency (at least for country A) is NEVER the final product.
tcostel: Yes, exactly. Where the conufusion lies is how that ties into the argument made in the book.
Yes, exactly. Where the conufusion lies is how that ties into the argument made in the book.
Everything in the book quote seems true, except I don't understand what he means by "foreign currency as his final product."
tcostel: For example, he argues the purpose of exporting is to be able to import,
For example, he argues the purpose of exporting is to be able to import,
True.
tcostel: but that does not seem to be the case for country A because it never accumulates dollars from country B using the model set up in the book.
but that does not seem to be the case for country A because it never accumulates dollars from country B using the model set up in the book.
If exports is equal to imports, which seems to be the case, then neither A nor B would accumulate the other's currency, although B may hold the foreign currency albeit temporarily.
tcostel: A foreign currency (at least for country A) is NEVER the final product. Like what I said earlier, I don't understand why the foreign currency should be the "final product." | Post Points: 20
A foreign currency (at least for country A) is NEVER the final product.
Like what I said earlier, I don't understand why the foreign currency should be the "final product."
ThinkBlue, thanks for your help.
As for the purpose of exporting is to import, this is where I get confused. Why would the exporter choose to import after receiving his own local currency back from the trade? Why not buy goods domestically (assuming he desires the goods produced domestically over importered goods). If that were the case, which is probable, then his own exporting would not result in importing.
Basically, this is the argument made in the book in a nutshell:
The exporter has foreign currency from trade. He must pay costs of production with domestic currency, so he buys domestic currency with the foreign currency. People will only demand foreign currency if they can use it to buy imports, so importers buy it. Of course, they will only demand the currency if the imports it can buy are cheaper than domestic products. If tariffs increase the cost of imports, the number of imports will then decline. Thus, importers will demand less of the foreign currency and buy less of it. Exporters will then fail to pay their expenses or become less productive because they can no longer convert currencies as frequently. If the tariff rate was very high, the businesses might even fail.
The argument logically makes sense, except for the first line which is the premise it is based on. If exporters do get paid in foreign currency, this may be the case, but even if they do (which is not always the case) who is to say they will use the money to buy imports, especially if they will convert it?
tcostel: The argument logically makes sense, except for the first line which is the premise it is based on. If exporters do get paid in foreign currency, this may be the case, but even if they do (which is not always the case) who is to say they will use the money to buy imports, especially if they will convert it? From my reading of the quote, I do not think he's saying that if someone exports, he must also import. He is saying that if there are exports, there must of necessity be imports (providing there are no capital flows). But the exporter and importer need not be one and the same person. If an exporter accepts payment in foreign currency, other than becoming an importer himself, he must exchange the currency with a domestic importer. For every export, there must be a corresponding import, else the export simply can't happen. tcostel: As for the purpose of exporting is to import, this is where I get confused. Why would the exporter choose to import after receiving his own local currency back from the trade? Why not buy goods domestically (assuming he desires the goods produced domestically over importered goods). If that were the case, which is probable, then his own exporting would not result in importing. Even if the exporter demands payments exclusively in domestic currency, the foreigner must secure that domestic currency somehow. For that to happen, there has to be importer who provides payment to the foreigner in domestic currency. If there are no imports, then there can be no exports (providing there are no capital flows). Here is the problem. The quote is not saying the exporter and importer must be one and the same person, but that every export must have a corresponding import, whether it is by the same person or distinct parties. | Post Points: 20
From my reading of the quote, I do not think he's saying that if someone exports, he must also import. He is saying that if there are exports, there must of necessity be imports (providing there are no capital flows).
But the exporter and importer need not be one and the same person.
If an exporter accepts payment in foreign currency, other than becoming an importer himself, he must exchange the currency with a domestic importer.
For every export, there must be a corresponding import, else the export simply can't happen.
tcostel: As for the purpose of exporting is to import, this is where I get confused. Why would the exporter choose to import after receiving his own local currency back from the trade? Why not buy goods domestically (assuming he desires the goods produced domestically over importered goods). If that were the case, which is probable, then his own exporting would not result in importing.
Even if the exporter demands payments exclusively in domestic currency, the foreigner must secure that domestic currency somehow.
For that to happen, there has to be importer who provides payment to the foreigner in domestic currency.
If there are no imports, then there can be no exports (providing there are no capital flows).
Here is the problem. The quote is not saying the exporter and importer must be one and the same person, but that every export must have a corresponding import, whether it is by the same person or distinct parties.
That's it. Thank you for bearing with me. I don't know why I was assuming that the exporter also had to act as the importer. I think it is because I am viewing the importers/exporters as nations, and not individuals which is what they truly are. My mind is still influenced by today's language. Countries don't trade with countries, individuals within a country trade with individuals in another.
Importer A buys from Exporter B with its own A currency. No exchange occurs in the borders of country A. Exporter B then must convert A currency to B currency to pay for its local costs. The buyer of the A currency will be an importer, Importer B (generally speaking, ignoring those who invest in currencies, etc). That Importer B will then buy from Exporter A, using A currency. Ultimately, both countries have traded goods, and there is a balance of trade.
If the above is correct, this is what the effect of Country A enacting a high tariff would be:
Importer A imports less because of the increased costs. Exporter B ends up making less money. Importer B therefore has less currency to buy from Exporter A with, so Exporter A makes less money. In conclusion, using tariffs to decrease imports from foreign countries will also decrease domestic exports to those countries.
Is all the above correct? If so, that leaves one question. Why do trade surpluses/deficits occur? The payments should naturally balance out if you must import/export the same.
Are trade surpluses/deficits then explained by foreign exchange rates and different valuations of currency? Also, many people say free trade will lead to lower wages. How can one respond to this? It seems logical that if countries are competing with each other, and labor is cheaper in one country, that wages in the other country must fall to be competitive.
tcostel: Importer A imports less because of the increased costs. Exporter B ends up making less money. Importer B therefore has less currency to buy from Exporter A with, so Exporter A makes less money. In conclusion, using tariffs to decrease imports from foreign countries will also decrease domestic exports to those countries. Is all the above correct?
Is all the above correct?
True. This is correct.
tcostel: If so, that leaves one question. Why do trade surpluses/deficits occur? The payments should naturally balance out if you must import/export the same.
If so, that leaves one question. Why do trade surpluses/deficits occur? The payments should naturally balance out if you must import/export the same.
I'm not sure if the book has or will explain the concept of capital flows. Basically, a capital flow is when someone buys a foreign asset abroad, such as a factory, real estate, debt, equity, etc.
Because of capital flows, this tips the trade balance into a trade surplus or deficit. The relationship is reflected in this equation:
CA + KA = 0
For the above equation, CA is called the Current Account, which is the trade balance, while KA is the Capital Account, which is the capital flow balance.
For all cases, the balance of payments must be zero, so that all incoming foreign currency must equal outgoing foreign currency. To maintain this balance of payments, the equation is restated as such:
CA = -KA
This means the Current Account surplus (trade surplus) must equal a Capital Account deficit.
For example, for Japan to maintain a Current Account surplus (trade surplus) with the US, there must be a Capital Account deficit such that more capital funds are leaving Japan and entering the US, then vice-versa.
Restate the equation again by reversing the signs:
-CA = KA
This means a Current Account deficit (trade deficit) must equal a Capital Account surplus.
Even though the US has a trade deficit with Japan, the US has a capital surplus with Japan, such that more capital funds are entering the U.S. from Japan then entering Japan from the US.
tcostel: Are trade surpluses/deficits then explained by foreign exchange rates and different valuations of currency?
Are trade surpluses/deficits then explained by foreign exchange rates and different valuations of currency?
It depends.
tcostel: Also, many people say free trade will lead to lower wages. How can one respond to this? It seems logical that if countries are competing with each other, and labor is cheaper in one country, that wages in the other country must fall to be competitive. This explanation is very complex, but this should provide a basic overview. Free trade, because of comparative advantage, increases the productivity of both countries. In general, wages is a function of worker productivity, that is more output per worker. The more productive the worker, the higher the wages. This may seem counter-intuitive, but wages for both countries should increase. Empirically speaking, wages for unskilled labor should decrease, while wages for skilled labor should increase. This is because, in general, more labor intensive production is most likely to be shifted abroad, while more capital intensive production remains within the country, and becomes more productive. | Post Points: 30
Also, many people say free trade will lead to lower wages. How can one respond to this? It seems logical that if countries are competing with each other, and labor is cheaper in one country, that wages in the other country must fall to be competitive.
This explanation is very complex, but this should provide a basic overview. Free trade, because of comparative advantage, increases the productivity of both countries.
In general, wages is a function of worker productivity, that is more output per worker. The more productive the worker, the higher the wages. This may seem counter-intuitive, but wages for both countries should increase.
Empirically speaking, wages for unskilled labor should decrease, while wages for skilled labor should increase.
This is because, in general, more labor intensive production is most likely to be shifted abroad, while more capital intensive production remains within the country, and becomes more productive.