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  • Hi I'm Adriene Hill and I'm Jacob Clifford and welcome to Crash Course Economics.

  • Today we're going to talk about international trade. So we all know our stuff is from everywhere.

  • Bangladesh, China, Vietnam, China again,

  • but what does it actually tell us about the global economy or the US economy?

  • And who's is benefitting from all this trade. And who's gonna clean all this up?

  • [Theme Music]

  • International trade is the lifeblood of the global economy. Basically when a good

  • or service is produed in, let's say, Brazil and sold to a person or business in the

  • US, that counts as an export for Brazil and as an import from US. As you might

  • expect, the United States is the world's largest importer because Americans love

  • their stuff. In 2014 Americans import over two trillion dollars worth of stuff,

  • like oil cars and clothing from countries all over the world. And if you

  • look around your local big box store, it feels like everything is made in China.

  • And we do import a lot of things from China but in terms of both imports, and

  • exports our largest trading partner's not China, it's Canada. The US and Canada trade

  • over six hundred billion dollars worth of goods and services each year.

  • The US imports a lot from Canada but exports almost as much. In fact, the United States is

  • the world's second-largest exporter. It sells high-tech things like

  • pharmaceuticals, jet turbines, generators and aircraft to countries all over the world.

  • It also exports intellectual goods like Kanye West albums and Pixar movies as

  • well as bulk commodities like corn, oil and cotton. The annual difference between

  • a country's exports and imports is called net exports. So if Brazil exports 250

  • billion dollars worth of goods and imports 200 billion that its net exports

  • are fifty billion. That means Brazil has a trade surplus. In 2014, net exports in

  • the usmore negative 722 billion dollars. That's what you call a trade deficit.

  • Some people assume that having a trade deficit is inherently bad. Why does the

  • US import nearly all of clothing? Why can't we clote ourselves?

  • US producers could easily make more than enough clothing to keep all of us

  • dressed. But they don't because they focus on other things that they're better at

  • producing. The US buys clothes from other countries because we can get them

  • cheaper than if we made them here. This is the value of international trade. It

  • doesn't make sense to make everything on your own if you can trade with other

  • countries that have a comparative advantage. It's worth mentioning here

  • that these savings sometimes come with other costs, especially for the people

  • who are producing these goods overseas. Unsafe and unfair working conditions, and

  • environmental degradation can be ugly side effects of

  • internnational trade. And we're gonna talk about that. For today though let's get a handle

  • on trade deficits. It can seem like exporting would make a country wealthy

  • while importing would make it poor. After all, if we buy products produced in other

  • countries than were shipping jobs overseas, right? Well only to an extent.

  • Imagine that I have a choice of buying an American made TV or a TV made in

  • Malaysia. Because of lower labor costs in Malaysia the imported TV cost $200 less

  • than the American made one. So I buy the imported TV. That may cost jobs at a TV

  • factory in the US but I saved $200 by buying the imported TV. And what am I

  • gonna do with those $200? I'm gonna spend them on something I couldn't have

  • afforded if I bought the US TV. Like maybe taking my family out to a baseball game

  • or to a restaurant. That creates jobs in those industries that wouldn't have

  • existed if I'd bought the more expensive TV. Economic theory suggests that

  • international trade reshuffles jobs from one sector of the economy to another, like

  • from the TV factory to the restaurant. But the quality of these jobs can be

  • markedly different. The guy assembling TVs at the US factory was probably

  • making a lot more at his manufacturing job before he got reshuffled to the burrito

  • assembly line at Chipotle. Which is just to say all this is really complicated

  • and what is good in the aggregate is not necessarily good for individuals. For

  • example, look at the North American Free Trade Agreement or NAFTA. It was

  • established in 1994 to drop trade barriers between Canada, the United

  • States and Mexico. Critics point out that NAFTA significantly increased US trade

  • deficits and they say it decreased the number of manufacturing jobs in many

  • states, as companies moved out of the US. Proponents of free trade point out that

  • the US economy boomed in the 1990's, creating millions of jobs including manufacturing jobs, and that free trade

  • has decreased the prices of all sorts of consumer goods, from vegetables to cars. So despite the fact

  • that some workers and industries were clearly hurt, economist would tell us

  • NAFTA's had a net positive impact on all three countries. By the way, you know

  • Thought café, the makers of the Thought Bubble? They're Canadian. These

  • graphics are imported. The debate over the value of specific trade agreements

  • continues. But it's unlikely that the world's largest economies will return to

  • strict protectionism. Protectionist policy, like placing high tariffs on

  • imports and limiting the number of foreign goods, usually hurts an economy

  • more than it helps. There are now several organizations designed to eradicate

  • protectionism, most notably the World Trade Organization or WTO. The WTO has been

  • effective in getting countries to agree to specific rules and help settle

  • disputes but it's also been accused of favouring rich countries and not doing

  • enough to protect the environment or workers. Trade between countries depends

  • on the demand for a country's goods, political stability and interest rates,

  • but one of the most important factors is exchange rates. Basically this is how

  • much your currency is worth when you trade it for another country's currency.

  • And let's engage in some foreign trade now by going to the Thought Bubble. Suppose the

  • US-Mexico exchange rate is 15 pesos to the dollar. If an American's on vacation in Mexico and wants to

  • buy some sunscreen that cost 60 pesos, they'll have to trade four dollars for pesos. Likewise if someone from

  • Mexico is on vacation in the US and wants to buy a $20 t-shirt she will need to exchange 300 pesos for

  • dollars. Now one let's think about what happens if the exchange rate goes up to twenty

  • pesos per dollar. Now to buy that 50 peso sunscreen in mexico it'll cost the American

  • tourist $3 instead of four. We say that the dollar has appreciated. At the same

  • time the Mexican tourist who wants to buy the $20 t-shirt will need four

  • hundred pesos instead of 300. It works the same way with imports and exports.

  • When the dollar appreciates, it gets cheaper for US consumers to import

  • foreign goods, and US exports to other countries get more expensive. US imports

  • rise and export fall. On the other hand

  • what if the exchange rate fell to 10 pesos per dollar? Now to buy that

  • sunscreen, the american tourist needs $6. Each dollar has gotten less powerful. We

  • say that the dollar has depreciated. At the same time, the Mexican tourist who

  • wants to buy the $20 t-shirt needs only two hundred pesos. So when the dollar

  • depreciates, foreign imports get more expensive which means they fall, and US

  • exports to other countries get cheaper which means they rise.

  • Most currencies, like the peso and the dollar have floating exchange rates that

  • change based on supply and demand. Like when the US imports more products from

  • Mexico, they exchange dollars for pesos. This will increase the demand for pesos,

  • and peso will appreciate. At the same time, the dollar will depreciate. Now some

  • countries have elected to peg their currency to another currency. This is

  • when a country's central bank wants to keep the exchange rate in a certain

  • range, and they buy or sell currencies to keep it in that range. The Chinese

  • government was well known for buying US dollars to keep the Chinese currency

  • artificially depreciated. When the US's importing goods from China, the yuan

  • would appreciate. Than the Chinese government would turn around and buy

  • dollars which kept the exchange rate about the same. This kept Chinese exports

  • cheap for Americans. Up to this point, we focused on exporting and importing goods

  • and services but there's a whole other side of international trade that involves

  • financial assets. Let's look at something called the balance of payments. It might

  • feel more like accounting than economics, but it helps to show how flows of money and

  • flows of goods and services are opposite sides of the same coin. Every country

  • keeps an accounting statement called the balance of payments that records all

  • international transactions. It's made up of two sub-accounts, the current account

  • and the financial account, sometimes called the capital account. The current

  • account records the sale and purchase of goods and services, investment income

  • earned abroad, and other transfers like donations and foreign aid. So when the US buys

  • fifty billion dollars of computers from China, that's recorded in the US current

  • account. So this is a simplification, but when Americans spend money on Chinese

  • goods, the people in China, in theory, have only two things they can do with that

  • money. They can buy US goods, or they can buy US financial assets, like stocks and

  • bonds. These transactions are recorded in the other side of account, the financial

  • account. There is a reason why the flow of goods and the flow of money are

  • symmetric. If consumers, businesses, and government want to buy more stuff than their

  • country is producing domestically, they have to import it. So there's a trade deficit. That country has to sell

  • assets to pay for those imports, and that's recorded in the financial account. The United

  • States has a very low savings rate which means it's consuming everything it's

  • producing and it sells assets to pay for the additional output it brings in from

  • overseas. Americans are choosing to run a trade deficit. International trade, like

  • everything else in economics, is about trade-offs and choices and winners and

  • losers. In purely economic terms trade deficits and surpluses are the result of

  • people and nations seeking their own self-interests. But while everyone is

  • acting in the self-interested way, international trade doesn't always meet

  • our individual interests. What might be good for the wider global economy, might

  • be really bad for me or my hometown. But in the aggregate, trade does improve the

  • global standard of living. It's just sometimes hard to see up close. Thanks for watching, we'll see you next week.

  • Crash Course Economics was made with the help of all these nice people. You can support

  • Crash Course at Patreon, where you can help keep Crash Course

  • free for everyone, forever. And you get rewards. Thanks for watching, DFTBA.

Hi I'm Adriene Hill and I'm Jacob Clifford and welcome to Crash Course Economics.

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Imports, Exports, and Exchange Rates: Crash Course Economics #15

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    Alvin He posted on 2016/08/17
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