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

Summary

Crash Course Economics explores international trade's impact on the global and US economies. It explains trade basics, such as exports, imports, and net exports, highlighting the US's position as a major importer and exporter. The video discusses trade deficits, comparative advantage, and the effects of trade agreements like NAFTA. It also touches on the importance of exchange rates, protectionism, and the World Trade Organization. The script concludes by emphasizing trade-offs and choices in international trade, noting its overall positive impact on the global standard of living despite individual hardships.

Takeaways

• 🌐 International trade is essential for the global economy, involving the exchange of goods and services across borders.
• 🛑 The United States is the world's largest importer, reflecting American consumers' demand for a wide range of products.
• 📈 Despite common perceptions, the US's largest trading partner is not China but Canada, with whom it exchanges over six hundred billion dollars in goods and services annually.
• 💡 The concept of net exports, the difference between a country's exports and imports, is crucial for understanding trade balances; a positive figure indicates a trade surplus, while a negative one signifies a trade deficit.
• 💸 The US had a trade deficit of 722 billion dollars in 2014, which some mistakenly view as inherently negative, but it's a complex economic indicator.
• 👕 The US imports clothing because it's more cost-effective than domestic production, illustrating the principle of comparative advantage in international trade.
• 🌳 International trade can have negative externalities, such as unsafe working conditions and environmental harm, particularly in countries with less regulation.
• 🔄 Trade can lead to a reshuffling of jobs within an economy, from one sector to another, but the quality and pay of these jobs can differ significantly.
• 📉 The North American Free Trade Agreement (NAFTA) is a point of contention, with critics citing increased trade deficits and job losses, while proponents highlight economic growth and lower consumer prices.
• 🏦 Protectionist policies, such as high tariffs, often harm economies more than they benefit them, and organizations like the WTO work to reduce such practices.
• 📊 Exchange rates are pivotal in international trade, affecting the cost of imports and exports, and can fluctuate based on various economic factors.
• 💼 The balance of payments is an accounting tool that records all international transactions, including the current account for goods, services, and transfers, and the financial account for investments.

Q & A

What is the main topic of the Crash Course Economics video presented in the transcript?

The main topic of the video is international trade, discussing its implications for the global and US economies, and who benefits from it.

Why is international trade considered the lifeblood of the global economy?

International trade is considered the lifeblood of the global economy because it involves the exchange of goods and services between countries, which drives economic growth and global interconnectedness.

Who are the hosts of the Crash Course Economics video in the transcript?

The hosts of the video are Adriene Hill and Jacob Clifford.

What was the United States' position as an importer and exporter in 2014 according to the video?

In 2014, the United States was the world's largest importer and the second-largest exporter.

Which country is the United States' largest trading partner in terms of both imports and exports?

Canada is the United States' largest trading partner in terms of both imports and exports.

What is meant by 'net exports' and how is it calculated?

Net exports refer to the annual difference between a country's exports and imports. It is calculated by subtracting the value of imports from the value of exports.

What is a trade surplus and how does it differ from a trade deficit?

A trade surplus occurs when a country exports more than it imports, indicating a positive net export value. A trade deficit, on the other hand, occurs when a country imports more than it exports, resulting in a negative net export value.

Why might the United States import clothing instead of producing it domestically?

The United States imports clothing because it can be obtained more cheaply from other countries due to their comparative advantage in producing clothing, allowing for cost savings that can be spent on other goods or services.

What is the economic concept that justifies trade between countries even if it leads to job losses in certain sectors?

The economic concept is comparative advantage, which suggests that countries should focus on producing goods for which they have lower opportunity costs, and trade for other goods with other countries that have a comparative advantage in producing them.

What are some of the criticisms of international trade mentioned in the video?

Some criticisms of international trade include unsafe and unfair working conditions for overseas workers, environmental degradation, and the negative impact on domestic industries and jobs due to increased imports.

How does the North American Free Trade Agreement (NAFTA) relate to the discussion on international trade in the video?

NAFTA is mentioned as an example of a trade agreement that has been both criticized for increasing trade deficits and decreasing manufacturing jobs, and praised for contributing to economic growth and job creation in the 1990s.

What role does the World Trade Organization (WTO) play in international trade?

The WTO plays a significant role in international trade by establishing rules for trade between nations, helping to settle disputes, and working to reduce protectionism. However, it has also been criticized for favoring rich countries and not doing enough to protect the environment or workers.

What is the significance of exchange rates in international trade?

Exchange rates are crucial in international trade as they determine the relative value of one currency against another. They affect the cost of imports and exports, influencing trade flows and economic activities across borders.

Can you explain the concept of the balance of payments and its components as mentioned in the video?

The balance of payments is an accounting statement that records all international transactions of a country. It consists of two main components: the current account, which records the sale and purchase of goods and services, and the financial account, which records transactions involving financial assets.

How does the balance of payments reflect the trade-offs and choices in international trade?

The balance of payments reflects trade-offs and choices by showing the symmetry between the flow of goods and the flow of money. A trade deficit in the current account, for example, indicates that a country is consuming more than it is producing domestically, which is balanced by selling assets in the financial account.

What are some of the broader implications of international trade for the global standard of living?

While international trade can lead to winners and losers at the individual and local levels, in the aggregate, it improves the global standard of living by allowing for more efficient production and distribution of goods and services, and by fostering economic growth and development.

Outlines

00:00

🌏 International Trade and Its Impact on the Global Economy

The first paragraph introduces the concept of international trade, emphasizing its importance to the global economy. Adriene Hill and Jacob Clifford discuss how goods and services produced in one country and sold in another, such as from Brazil to the US, are considered exports and imports, respectively. The US is highlighted as the world's largest importer, with significant imports from various countries, but notably from China and Canada, which is the US's largest trading partner. The paragraph also touches on the value of trade, including the concept of comparative advantage, and the potential downsides such as job losses and environmental impacts. The discussion on trade deficits and surpluses is initiated, with the US having a trade deficit in 2014. The paragraph concludes by challenging the assumption that trade deficits are inherently bad, suggesting that trade can lead to job reshuffling across different sectors of the economy.

05:00

💰 Exchange Rates and International Trade Dynamics

The second paragraph delves into the role of exchange rates in international trade, explaining how the value of one currency relative to another affects the cost of imports and exports. It uses a hypothetical US-Mexico exchange rate to illustrate how changes in the rate can make imports cheaper or more expensive for consumers and impact the competitiveness of exports. The paragraph also covers the floating exchange rates, where currencies like the peso and the dollar are valued based on supply and demand, and the practice of currency pegging, where a country's central bank intervenes to maintain a stable exchange rate. The discussion then shifts to the balance of payments, which records all international transactions, including the current account for goods, services, and transfers, and the financial account for investment income and financial assets. The paragraph concludes by reflecting on the broader implications of trade, acknowledging the trade-offs and the fact that while trade can improve the global standard of living, it may not always align with individual interests.

Keywords

💡International Trade

International trade refers to the exchange of goods and services across national borders. It is a central theme of the video, illustrating how countries interact economically and the implications of these exchanges. For example, the script mentions how the US imports a significant amount of goods from various countries, highlighting the interconnectedness of the global economy.

💡Export

An export is a good or service that is produced within a country and sold to another country. In the context of the video, it explains that when Brazil sells to the US, it is considered an export for Brazil, emphasizing the dynamic of international trade and how it contributes to a nation's economic activity.

💡Import

An import is a good or service that is brought into a country from abroad. The video uses the example of the US as the world's largest importer, showcasing the variety of products Americans consume from around the world, and how this affects the economy and trade balance.

💡Trade Surplus

A trade surplus occurs when a country exports more goods and services than it imports. The video uses Brazil as an example, where it exports $250 billion and imports $200 billion, resulting in a surplus of $50 billion, indicating a favorable trade position.

💡Trade Deficit

A trade deficit is the opposite of a surplus, where a country imports more than it exports. The video points out that in 2014, the US had a trade deficit of negative $722 billion, suggesting a reliance on foreign goods and the impact on the economy.

💡Comparative Advantage

Comparative advantage is an economic concept where a country specializes in producing goods for which it has a lower opportunity cost than its trading partners. The video explains that the US buys clothes from other countries because it can obtain them more cheaply, illustrating the benefits of trade based on comparative advantage.

💡North American Free Trade Agreement (NAFTA)

NAFTA is a specific trade agreement that was established in 1994 to reduce trade barriers between Canada, the United States, and Mexico. The video discusses the debate surrounding NAFTA, including its impact on trade deficits and job losses in the US, as well as its proponents' arguments about economic growth and reduced consumer prices.

💡World Trade Organization (WTO)

The WTO is an international organization that aims to regulate international trade and eradicate protectionism. The video mentions the WTO's role in setting rules and resolving disputes, while also noting criticisms regarding its perceived favoritism towards rich countries and insufficient environmental and labor protections.

💡Exchange Rates

Exchange rates determine the value of one currency in terms of another. The video explains how exchange rates affect the cost of imports and exports, using the example of a change in the US-Mexico exchange rate and its impact on the cost of goods for tourists and trade between the two countries.

💡Balance of Payments

The balance of payments is a record of all international transactions of an economy, including the current and financial accounts. The video describes how it reflects the symmetry between the flow of goods and services (current account) and the flow of money (financial account), illustrating the interconnected nature of international trade and finance.

💡Pegged Currency

A pegged currency is one that a country's central bank maintains at a stable rate against another major currency. The video gives the example of China's past practice of buying US dollars to keep the yuan artificially depreciated, which helped keep Chinese exports cheap for American consumers.

Highlights

International trade is essential to the global economy, with goods and services being produced in one country and sold in another.

The United States is the world's largest importer, with Americans importing over two trillion dollars worth of goods in 2014.

Despite common perceptions, the US's largest trading partner is not China but Canada, with over six hundred billion dollars in trade annually.

The US is also the world's second-largest exporter, selling high-tech products, intellectual goods, and bulk commodities globally.

Net exports, the difference between exports and imports, can indicate a trade surplus or deficit.

In 2014, the US had a trade deficit of 722 billion dollars, indicating more imports than exports.

A trade deficit is not inherently bad, as it can reflect a country focusing on areas where it has a comparative advantage.

International trade can lead to job reshuffling within an economy, from one sector to another.

The North American Free Trade Agreement (NAFTA) has been both criticized for increasing trade deficits and praised for economic growth.

Economists argue that despite negative impacts on certain workers and industries, NAFTA had a net positive effect on all three involved countries.

Protectionist policies, such as high tariffs on imports, usually hurt an economy more than they help.

The World Trade Organization (WTO) aims to eradicate protectionism and settle trade disputes but has faced criticism for favoring rich countries.

Exchange rates play a crucial role in international trade, affecting the cost of imports and exports.

A stronger dollar (appreciation) makes imports cheaper for the US but makes US exports more expensive for other countries.

A weaker dollar (depreciation) has the opposite effect, making imports more expensive and exports cheaper.

Some countries peg their currency to another to maintain a stable exchange rate, influencing trade costs.

The balance of payments records all international transactions, including the current account for goods, services, and transfers, and the financial account for asset transactions.

International trade involves trade-offs and choices, with winners and losers, and can improve the global standard of living despite individual hardships.

Transcripts

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.

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