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Still buying imported cars.

Discussion in 'Business, Administration & Management' started by OldWiseGuy, Oct 20, 2011.

  1. BeOfGoodCheer

    BeOfGoodCheer Romans 8:38-39

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    Going off a small window of time when our edge slipped, isn't good business sense, and is no longer valid rationale.
     
  2. contango

    contango ...and you shall live...

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    Personally I look for value for money, and if home-grown products don't offer it then I don't buy them. What happened in the past is academic, when I'm looking to buy something I look at what gives me good value now rather than what might have given me good value in the past.
     
  3. now faith

    now faith Veteran Supporter

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    Well maybe you should try working in Japan or China you may enjoy it being free of lazy over paid American workers . Or if you wait a while Japan and China will be setting standards for living right here.
     
  4. Yekcidmij

    Yekcidmij Economist

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    Hyundai recently built a huge plant near where I live and within my home state Honda, Mercedes, and Toyota have all built plants. Now, when people buy the cars made at these plants, technically the cars are imported, yet it's people here in my state that are benefiting from the jobs. And consumers are benefiting by getting the kind of cars they want at a price they want.

    Why should the jobs of people in my state be threatened because of some desire for building cars in Detroit? Why do consumers have to settle for a lesser product and/or a higher price? Why can't we just let people buy what they want? It's working for the state I'm from.

    Having said that I have a Dodge Charger. It's fun, goes fast, and looks good. I didn't do it to help Detroit - I bought it because I like the car.

    And there really isn't a trade deficit anyway. There's a Current Account deficit - but that means there's a Capital Account surplus.
     
    Last edited: Feb 7, 2012
  5. Yekcidmij

    Yekcidmij Economist

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    It can also be mathematically shows that in order to export more goods and services than we import, we would have to devalue the US dollar. The easiest way to see this is to look at the relation between the Capital Account and the Current Account. The Current Account is the net export of goods and services. The Capital Account is the net export of assets. It's is always the case that,

    Current Account + Capital Account = 0.

    When you buy an imported good, you must pay for it with something (realizing here that the dollar itself is an asset). For every import of a good or service, there is a corresponding export, even if that export is an asset rather than another good or service. If you want to export more goods than you import, then you must import more assets than you export. Since our biggest asset of export is the dollar itself, a rise in the export of goods means a fall in the export of dollars. Said another way, foreigners wouldn't want to hold dollars. Surely we can see that a loss of the reserve status of the dollar, or a weaker dollar, should be approached with caution.

    Another way to see how a rise in exports means a fall in the dollar is to look at GDP accounting.

    PQ = Y = C + I + G + (X-M)

    P = Price level
    Q = Quantity of output
    Y = Total output
    C = consumption
    I = Investment
    G = gov't spending
    X = Exports of goods
    M = imports of goods

    The Law of One Price states that the price of a good in one country should be the same as that of the price of that same good in another country. So, an apple in the US priced in US dollars should be the same price as an apple in Canada priced in Canadian dollars multiplied by the exchange rate. So the price level of US goods in US dollars is equal to the price level of goods in some foreign currency multiplied by the exchange rate,

    P[usd] = S*P[xxx]; where S = usd/xxx and xxx = some foreign currency

    we can see then that,

    S*P[xxx]*Q = C + I + G + (X - M)

    And now we can look at what happens when the values of imports and exports of goods changes in the economy. For ease of analysis, let's hold C, I, and G constant for the moment. And let's say that there is a huge trade deficit so that imports (M) are much greater than exports (X). Then a policy change is made to ensure that exports grow relative to imports. As net exports (X-M) approach 0, it must be the case that such a change is met by a fall in the price level of the foreign country (P[xxx]), a fall in production of the USA (Q), and/or a strengthening of the foreign currency relative to the US currency (S = usd/xxx).

    The initial response would most likely be a fall in the dollar relative to the foreign currency as firms exploited the opportunity for profit by selling their goods at the higher foreign price in the foreign country in the foreign country's currency. As more goods flooded the foreign market, the price level would fall.

    Over the long run, the equilibrium would tend toward the law of one price,

    P[usd] = S*P[xxx]



    Take away:
    A rise in exports of goods means a fall in exports of highly traded domestic assets. The chief of these highly traded domestic assets is the dollar itself. So a rise in exports means a fall in the dollar's value in addition to a rise in price of goods that were formerly imported from country xxx.

    The only way this wouldn't be the case is if either consumption growth, domestic investment growth, and/or government spending growth outpaced the growth of exports.
     
  6. OldWiseGuy

    OldWiseGuy I've fallen and can't get up.

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    So debt is not our problem?
     
  7. Yekcidmij

    Yekcidmij Economist

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    A trade deficit (really, a current account deficit) is not the same thing as a budget deficit. The budget deficit will end up being a problem if we continue down the path we're on now. A Current Account deficit simply means that foreigners are willing to exchange their goods and services for our financial assets (which is mainly dollars) and we are willing to exchange our assets for their goods and services. Current Account deficit = Capital Account surplus.

    It's the budget deficit that is the potential problem. But even then,if we take the case of a closed economy (ie, no foreign sector) it's also the case that a government budget deficit means private sector savings/surplus. A gov't budget surplus means a private sector deficit. You can see this by looking at the "circular flow of income",

    Leakages = Injections
    Savings + Taxes + Imports = Investment + Gov't Spending + Exports

    (G-T) = (S-I) + (M-X)
    Gov't sector balance = Private Sector balance + Foreign Sector balance

    When the gov't sector is in surplus (when G < T), it must be the case that either (1) the private sector is in deficit and/or (2) the Foreign sector is in surplus. In a closed economy (ie, if there were no foreign trade), the gov't sector balance would be the inverse of the private sector balance.

    There is no such thing as a free lunch.
     
    Last edited: Feb 9, 2012
  8. wpiman2

    wpiman2 Senior Member

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    Translation; we are getting goods in return for selling America.

    ie. her companies, her property, and her debt.
     
  9. Yekcidmij

    Yekcidmij Economist

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    Yea. People are buying goods and services with something other than goods and services. I imagine that it's usually dollars and not so much companies and property. People don't usually buy Toyota's with company stock or farmland for example. Some countries gov'ts will purchase US treasuries to try to manage exchange rates (Hong Kong, Japan, and China come to mind) and numerous others buy US Treasuries for various reasons, which influences the current account balance. This is what it means for the dollar to be the reserve currency of the world though. Our currency is the basis for the value of other currencies.

    The BEA keeps statistics on exactly what assets are being exchanged: http://www.bea.gov/iTable/iTable.cfm?ReqID=6&step=1 It's under capital account and financial account in the table. The biggest asset class owned by foreigners is, of course, US treasuries.


    As far as individuals go, who really cares if I want to exchange my property (be it physical land, money, stocks, etc..) for something like an imported car?
     
    Last edited: Feb 9, 2012
  10. OldWiseGuy

    OldWiseGuy I've fallen and can't get up.

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    I still think the budget deficit is directly related to the trade deficit. Tax revenues are based on domestic economic activity. When that activity is exported tax revenues are affected and the gov't has to borrow. I will go to my grave believing that the only way to solve the problem is to inject debt-free money into the economy by paying for gov't contracts directly from the Treasury. This creates more equity (thus less debt) in the economy, much like adding 'clean' grain to grain that tests too high in pollutants in order to 'clean' it up enough to legally sell.

    Our economy is infected with unnecessary debt that is polluting it. The great irony is that those of us who want the Fed Reserve abolished are told that if the gov't controlled the monetary system they would run the printing presses 24/7 and create runaway inflation. But is that worse than what is happening because of 'borrowing' the same amount of money and placing our grandkids in hopeless debt? Excess money can be removed from the economy through the budget process whereas debt, once incurred, can never be repaid.
     
    Last edited: Feb 10, 2012
  11. Yekcidmij

    Yekcidmij Economist

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    Ok. I just don't think that's entirely accurate.
     
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