International Trade in One Lesson
It seems we need a refresher.
It is often said that we all run trade deficits with our local grocery store as a way to demonstrate how silly the worries are over trade deficits. Let’s expand upon that for a more general lesson on how international trade works.
Keep in mind that the only economic nuance with international trade is that it is conducted using different currencies between both parties. Crossing national borders doesn’t mean anything otherwise. Aside from the currency twist, it is just like any other trade situation.
Imagine this . . .
I walk down the street to my local grocery store to do some shopping. Upon filling my basket with $100 worth of stuff, I head to the checkout lane. The checker rings it all up, but rather than hand over $100 cash or some equivalent instrument like a credit card, I hand over 100 of my homemade Stevebucks (symbol SB).
I explain that SB is the unit and medium of account in my household. I pay my kids for chores with it. They buy things like Minecraft screentime with it. I even have calculated the value of my possessions including the home itself in SB.
SB just happen to currently trade at a one-to-one exchange rate with the U.S. Dollar. Hence, right now my groceries from my perspective are worth 100SB and $100.
After thinking it over with curiosity and calling over a manager to do the same, the store decides to accept this as a valid form of payment. They know me well and are used to my eccentric ways. They also know me to be of excellent character and a sound mind.
SB represents a claim on my assets given that I am the issuer. And they know my integrity will stand behind it.
I leave with the groceries and they retain the 100SB. As it stands, I have a 100SB/$100 trade deficit with the store while they have the equivalent trade surplus.
Now, what can they do with the SB given that they really don’t want them long term? They could give it out as change to other customers or pay their bills with it, but that would require those counterparties to accept it. The store knows me enough to trust SB, but these others do not necessarily share that trust.
That leaves the store with these options:
They could swap them with my son knowing he does find SB useful and also carries around U.S. currency.
They could buy services from me like having me do 100SB worth of blogging on behalf of the store.
They could come to my house and buy something like the rug I have currently valued at 100SB.
Finally, they could invest in my house.1 Given that I value it at 1,000,000SB, they would own 1/10,000th of this piece of real estate.
The effect of each would be the following:
Since the store is seeking to sell SB, that somewhat drives down the value of SB relative to U.S. Dollars—increased supply of SB and demand for $ in the foreign exchange market. This will discourage my importing and attract others a bit to my exports.
This is an obvious offset to my (goods) trade deficit giving me an equal and opposite (services) trade surplus.
I have fewer assets in this case (presumably the rug) and more of my own currency—notice how obvious it is in this scenario that exports are the cost of attaining the benefit of imports.
In this case the value of my household assets have appreciated some by the grocery store bidding up to buy the share in my house or simply I have made a trade (SB for 1/10,000th a share in the house) that I obviously prefer since I offered/accepted it.
Notice how it all balances out. That is why it is called the “balance of trade”. There is always an offsetting transaction(s). And, very importantly, ALL. OF. THESE. ARE. DESIRED!
If they weren’t, one or both parties in each case would not agree to them. Not only is no one poorer from any or all of the transactions. EVERYONE IS WEALTHIER!
Oh, I guess I could have grown my own food. To do so would mean writing fewer blog posts. Despite how you might evaluate my skills as a blogger, I assure you it is much, MUCH better than my skills as a farmer.
Unless you really aspire to be Scrooge McDuck, there is no reason for you to desire currency over that which currency can buy. Currency is simply the oil that allows us to more easily attain that which we really want.
In this scenario we are considering the house to be a productive, capital asset. Just assume that since my business is conducted from there, it is analogous to a factory.