Definitions and Basics
Balance of
Payments, from the Concise Encyclopedia of Economics
The balance of payments accounts of a country record the
payments and receipts of the residents of the country in their transactions
with residents of other countries. If all transactions are included, the
payments and receipts of each country are, and must be, equal. Any apparent
inequality simply leaves one country acquiring assets in the others. For
example, if Americans buy automobiles from Japan, and have no other
transactions with Japan, the Japanese must end up holding dollars, which they
may hold in the form of bank deposits in the United States or in some other
U.S. investment. The payments of Americans to Japan for automobiles are
balanced by the payments of Japanese to U.S. individuals and institutions,
including banks, for the acquisition of dollar assets. Put another way, Japan
sold the United States automobiles, and the United States sold Japan dollars or
dollar-denominated assets such as Treasury bills and New York office
buildings....
Although the totals of payments and receipts are necessarily equal, there will
be inequalities—excesses of payments or receipts, called deficits or surpluses—in
particular kinds of transactions. Thus, there can be a deficit or surplus in
any of the following: merchandise trade (goods), services trade, foreign investment
income, unilateral transfers (foreign aid), private investment, the flow of
gold and money between central banks and treasuries, or any combination of
these or other international transactions.
Imports, from AmosWEB's Economics Gloss*arama.
IMPORTS: Goods and services produced by the foreign sector and
purchased by the domestic economy. In other words, imports are goods purchased
from other countries. The United States, for example, buys a lot of the stuff
produced within the boundaries of other countries, including bananas, coffee,
cars, chocolate, computers, and, well, a lot of other products. Imports,
together with exports, are the essence of foreign trade--goods and services
that are traded among the citizens of different nations. Imports and exports
are frequently combined into a single term, net exports (exports minus
imports)....
Exports, from AmosWEB's Economics Gloss*arama.
EXPORTS: The sale of goods to a foreign country. The United
States, for example, sells a lot of the stuff produced within our boundaries to
other countries, including wheat, beef, cars, furniture, and, well, almost
every variety of product you care to name. In general, domestic producers (and
their workers) are elated with the prospect of selling their goods to foreign
countries--leading to more buyers, a higher price, and more profit. The higher price,
however, is bad for domestic consumers. In that domestic consumers tend to have
far less political clout than producers, very few criticisms of exports can be
heard....
Balance of Trade, from AmosWEB's Economics Gloss*arama.
BALANCE OF TRADE: The difference between the value of goods and
services exported out of a country and the value of goods and services imported
into the country. The balance of trade is the official term for net exports
that makes up the balance of payments. The balance of trade can be a
"favorable" surplus (exports exceed imports) or an
"unfavorable" deficit (imports exceed exports). The official balance
of trade is separated into the balance of merchandise trade for tangible goods
and the balance of services....
A balance of trade surplus is most favorable to domestic producers responsible
for the exports. However, this is also likely to be unfavorable to domestic
consumers of the exports who pay higher prices.
Alternatively, a balance of trade deficit is most unfavorable to domestic
producers in competition with the imports, but it can also be favorable to
domestic consumers of the exports who pay lower prices....
In the News and
Examples
Popular
myth: Aren't imports bad? Aren't exports good? Isn't a trade deficit a bad
thing? The very word "deficit" sounds bad! Economic reality: An
excess of imports over exports merely sends dollar bills overseas while
bringing real goods and services into the country for immediate use. If
foreigners want to hold onto those dollars, while we get to put their goods to
immediate use benefiting our consumers and creating new investment for our
industries, then we get an even better deal! Prohibiting trade severely limits
what you can accomplish.
- Don
Boudreaux on the Economics of "Buy Local".
Podcast at EconTalk, April 16, 2007.
Proponents of buying local argue that it is better to buy from
the local hardware store owner and nearby farmer than from the Big Box chain
store or the grocery store headquartered out of town because the money from the
purchase is more likely to "stay in the local economy." Don Boudreaux
of George Mason University talks with EconTalk host Russ Roberts about the
economics of this idea. Is it better to buy local than from a seller based out
of town? Is it better to buy American than to buy foreign products? Does the
money matter? In this conversation, Boudreaux and Roberts pierce through the
veil of money to expose what trade, whether local, national, or international,
really accomplishes.
- The
Buy-Locally-Owned Fallacy, by Karen Selick. November 3,
2008.
An advertisement appears regularly in the newspaper in my
community (Belleville, Ontario, Canada) sponsored by a group of local
businesses. It reads: "Buy locally owned. Your money stays in the
community. Think about it—everybody wins."
- The 100-Mile Suit. Buy-local example. From Wired, March 31, 2007:
Last year, educator and costume designer Kelly Cobb asked her
students at Drexel University to trace the provenance of their clothes. When
the task proved impossible, she realized how far removed we are from what we
wear.
It was then that Cobb came up with the idea of creating a suit of clothes made
entirely from materials prepared within a 100-mile radius of her home.
- Don
Boudreaux on Globalization and Trade Deficits. Podcast at
EconTalk, January 21, 2008.
Don Boudreaux, of George Mason University, talks about the ideas
in his book, Globalization. He discusses comparative
advantage, the winners and losers from trade, trade deficits, and inequality
with EconTalk host Russ Roberts.
- The
Balance of Trade, by Frédéric Bastiat. Chapter 6 in Economic
Sophisms, first published 1845 in France.
There is still a further conclusion to be drawn from all this,
namely, that, according to the theory of the balance of trade, France has a
quite simple means of doubling her capital at any moment. It suffices merely to
pass its products through the customhouse, and then throw them into the sea. In
that case the exports will equal the amount of her capital; imports will be
nonexistent and even impossible, and we shall gain all that the ocean has
swallowed up.
"You're just joking," the protectionists will say. "We couldn't
possibly have been saying anything so absurd." Indeed you have, and, what
is more, you are acting upon these absurd ideas and imposing them on your
fellow citizens, at least as far as you can.
The truth is that we should reverse the principle of the balance of trade and
calculate the national profit from foreign trade in terms of the excess of
imports over exports. This excess, minus expenses, constitutes the real
profit....
- Why not just buy American? Foreign
Trade, or The Wedding Gown, by Jane Haldimand Marcet
in John Hopkins's Notions on Political Economy. 1831.
One evening, when John returned from his work, he found his
daughter Patty showing off a new silk gown to her mother. It was a present
which her lover had just given her, for the approaching wedding day. Patty's
eyes, which had seldom beheld any thing so beautiful, shone with delight, as
her mother admired it; and her father gave her a hearty kiss, and said she would
be as smart a bride as had ever been married in the village. "Ay, and it
is a French silk, too, mother," exclaimed Patty.—"Why, as for
that," replied her mother, "I don't see the more merit in its being
French; and I did not think, Patty, you were such a silly girl as to have all
that nonsense in your head. No, indeed, it is bad enough for the great
lady—folks to make such a fuss about French finery, so that they can't wear a
bit of honest English riband. I don't like your gown a bit the better for being
French. No; and I should have thought that your husband, that is to be, might
have given you an English silk instead."...
A Little History: Primary Sources and References
Mercantilism,
from the Concise Encyclopedia of Economics
Mercantilism is economic nationalism for the purpose of building
a wealthy and powerful state. Adam Smith coined
the term "mercantile system" to describe the system of political
economy that sought to enrich the country by restraining imports and
encouraging exports. This system dominated western European economic thought
and policies from the sixteenth to the late eighteenth century. The goal of these
policies was, supposedly, to achieve a "favorable" balance of trade
that would bring gold and silver into the country. In contrast to the
agricultural system of the physiocrats, or the laissez-faire of the nineteenth
and early twentieth centuries, the mercantile system served the interests of
merchants and producers such as the British East India Company, whose
activities were protected or encouraged by the state....
Exports and Imports,
from Lalor's Cyclopedia of Political Science
By imports is meant all the merchandise brought
into a country from other countries; by exports, all the
merchandise which leaves a country for other countries....
Balance of Trade,
from Lalor's Cyclopedia of Political Science
Balance of Trade, in commerce, the term commonly used to
express the difference between the value of the exports from, and imports into
a country: the balance used to be said to be favorable when
the value of the exports exceeded that of the imports, and unfavorable when
the value of the imports exceeded that of the exports. And in many countries
this was long believed to be the case, and to a late period they were annually
congratulated by their finance ministers on the excess of exports over the
imports....
Mercantile
System, from Lalor's Cyclopedia of Political Science
The theory of the balance of trade and the consequences which
were drawn therefrom constitute what is called the mercantile system, because
the whole of this system tends to consider foreign commerce as the most
productive branch of a nation's labor. It is supposed that a nation can sell
more than it buys, in a way to ruin neighboring nations by absorbing their
precious metals by the greatest possible exportation and the least possible
importation. This false theory still prevails in the minds of the masses, and
still serves as a rule for many administrations and governments; it forms the
basis of the economic ideas of all the writers of the eighteenth century, who
did not belong to the physiocratic school or to that of Adam Smith; it is still
appealed to in our days by statesmen, and by all those who, by conviction or
for financial considerations, defend prohibition, high tariffs and custom
impediments....
