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

Summary

In this Crash Course Economics episode, hosts Adriene Hill and Jacob Clifford delve into the nuances of international trade, discussing its significance, benefits, complexities, and often controversial aspects. The episode begins by explaining how trade works and highlighting the extensive trade relationships, especially between the US and countries like Canada and China. They examine trade deficits and surpluses, illustrating how these reflect broader economic choices and trade-offs. The episode also ventures into the effects of trade agreements like NAFTA and the dynamics of currency exchange rates in influencing international trade. Finally, they explore the balance of payments and the interplay of goods, services, and financial assets in global trade.

Highlights

• US is the largest importer, but also a major exporter of high-tech and intellectual goods 📈.
• Trade deficits happen when a country imports more than it exports, often focusing on producing what they excel at 💼.
• Exchange rates can make imports cheaper or more expensive, affecting trade balances and consumer choices 💰.
• Free trade agreements can expand economic opportunities but may also lead to job losses in certain sectors 🔄.
• The balance of payments accounts for trade in goods, services, and assets, providing insight into a country's economic interactions globally 📊.

Key Takeaways

• International trade is essential for the global economy, helping countries specialize and benefit from comparative advantage 🌍.
• Trade deficits aren't inherently bad; they represent economic choices and the flow of capital across borders 💼.
• Currency exchange rates significantly impact international trade by affecting the cost of imports and exports 💱.
• Free trade agreements, like NAFTA, have complex effects that can benefit economies overall but also hurt specific industries and workers ⚖️.
• Organizations like the WTO work to reduce protectionism, though they face criticism regarding environmental and labor issues 🌱.

Overview

International trade is a core component of the global economy, enabling countries to exchange goods and services efficiently. This exchange allows nations to specialize in producing what they are best at and benefit from economies of scale. The US, as a significant player in global trade, imports a vast array of products while also exporting high-tech goods, intellectual properties, and commodities.

Trade balances, whether deficits or surpluses, signify the ebb and flow of global economic activity. While trade deficits are often seen negatively, they're simply a reflection of a country importing more than it exports and are tied to broader financial practices, like investing in foreign assets. These balances are influenced by various factors, including currency exchange rates and trade agreements.

Free trade agreements like NAFTA have historically sparked debate over their impact on economies and jobs. While such agreements can stimulate growth and lower consumer prices, they also may lead to job reallocation, impacting manufacturing sectors. Meanwhile, the balance of payments showcases the intricate relationship between a country's outgoing goods and incoming capital, underscoring the interconnected nature of modern economies.

Chapters

• 00:00 - 00:30: Introduction to International Trade The chapter introduces international trade, highlighting the global interconnection through traded goods from various countries like Bangladesh, China, and Vietnam. It raises questions about the implications for the global and US economies and who benefits from trade. The hosts, Adriene Hill and Jacob Clifford, express optimism about explaining the complexities of international trade in the subsequent discussions.
• 00:30 - 01:00: Imports and Exports The chapter 'Imports and Exports' discusses the concept of international trade, using Brazil and the US as examples. It explains how goods produced in one country and sold to another are counted as exports for the producing nation and imports for the purchasing nation. The US is highlighted as the largest importer, importing over two trillion dollars worth of goods in 2014, including oil, cars, and clothing from various countries. The chapter also mentions the perception of many consumer goods being manufactured in China due to the high volume of imports from the country.
• 01:00 - 02:00: US Trade Relations and Economic Impact This chapter focuses on the trade relations between the United States and its largest trading partner, Canada, highlighting the exchange of goods and services valued at over $600 billion annually. The US exports a range of products including pharmaceuticals, high-tech equipment, and cultural goods like music and films. The concept of net exports is introduced, explaining the balance between a country's exports and imports.
• 02:00 - 02:30: Net Exports and Trade Deficits The chapter "Net Exports and Trade Deficits" discusses the concept of net exports, which is the difference between a country's exports and imports. Using Brazil as an example, it explains how having higher exports than imports leads to a trade surplus. In contrast, the US had a trade deficit of 722 billion dollars in 2014, indicating more imports than exports. The chapter challenges the notion that a trade deficit is inherently negative and explores reasons why the US imports a significant portion of its clothing. It suggests that although US producers are capable of manufacturing enough clothing, there are other factors influencing import decisions.
• 02:30 - 03:30: Comparative Advantage and Trade-offs This chapter discusses the concept of comparative advantage in international trade, emphasizing that countries benefit by specializing in the production of goods they are more efficient at and trading for the rest. It explains that the U.S. imports clothes because they are cheaper to purchase from abroad than to produce domestically. The chapter also touches on the potential downsides of such trade, particularly concerning the unfair and unsafe working conditions sometimes faced by overseas workers.
• 03:30 - 04:00: Effects of International Trade The chapter discusses the negative side effects of international trade, particularly focusing on environmental degradation. It also delves into the topic of trade deficits, explaining common misconceptions around exporting and importing goods. The chapter provides an example comparing the purchase of an American-made TV and a Malaysian-made TV, highlighting the impact of labor costs on the price difference.
• 04:00 - 05:30: NAFTA and Free Trade Debate The chapter explores the impact of NAFTA and the broader debate on free trade, using a practical example to illustrate its consequences. It describes how purchasing an imported product, like a TV, instead of a more expensive American-made one, can affect domestic jobs. The saved money is spent on other activities, which creates jobs in new areas. This act of purchasing decisions showcases the principle of economic theory where international trade redistributes jobs across different sectors of the economy.
• 05:30 - 06:30: Protectionism and WTO This chapter discusses the notion of protectionism and its implications within the framework of the World Trade Organization (WTO). It highlights the complexity of job quality when comparing manufacturing jobs, such as working at a TV factory, to service jobs like working at Chipotle. The text also touches upon the broader economic impacts of trade agreements like the North American Free Trade Agreement (NAFTA), suggesting that what's beneficial for the economy as a whole might not always be advantageous for individual workers.
• 06:30 - 13:00: Exchange Rates and Their Impact The chapter begins by discussing the establishment of NAFTA in 1994, aimed at reducing trade barriers between Canada, the United States, and Mexico. It presents a debate on its impact: critics argue that NAFTA led to increased US trade deficits and a decrease in manufacturing jobs as companies relocated outside the US. On the other hand, supporters highlight that the US economy thrived in the 1990s, with significant job creation in various sectors, including manufacturing, and a reduction in consumer goods prices.
• 13:00 - 17:00: Balance of Payments This chapter discusses the impact of the North American Free Trade Agreement (NAFTA) on the economies of the member countries. It acknowledges that while some workers and industries were negatively affected, economists agree that NAFTA has had a net positive impact on all three countries involved. The chapter also highlights the ongoing debate about the benefits of specific trade agreements and notes that despite the debate, it is unlikely that the world's largest economies will revert to strict protectionist policies, such as imposing high tariffs. Additionally, the chapter makes a reference to Thought Café, a Canadian company responsible for creating imported graphics for the Thought Bubble.
• 17:00 - 18:00: Conclusion The conclusion chapter emphasizes that while protectionism through the use of imports restrictions tends to harm an economy more than help it, there are international efforts like the World Trade Organization (WTO) aimed at eliminating such practices. The WTO is recognized for successfully negotiating rules and resolving disputes between nations. However, it faces criticism for allegedly prioritizing the interests of wealthy countries and insufficiently addressing environmental and labor concerns. Additionally, the chapter notes that international trade is influenced by the demand for goods, political stability, and interest rates.

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

• 00:00 - 00:30 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
• 00:30 - 01:00 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
• 01:00 - 01:30 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
• 01:30 - 02:00 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
• 02:00 - 02:30 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
• 02:30 - 03:00 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
• 03:00 - 03:30 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
• 03:30 - 04:00 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
• 04:00 - 04:30 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
• 04:30 - 05:00 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
• 05:00 - 05:30 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,
• 05:30 - 06:00 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
• 06:00 - 06:30 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
• 06:30 - 07:00 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
• 07:00 - 07:30 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
• 07:30 - 08:00 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
• 08:00 - 08:30 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
• 08:30 - 09:00 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
• 09:00 - 09:30 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
• 09:30 - 10:00 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.