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September 02, 2007
Exports are Costs; Imports are Benefits
Don Boudreaux
Today's edition of the Chicago Tribune published this letter of mine:
You're correct that free trade likely would create more opportunities for workers in Illinois to produce goods for export ("How free trade boosts Illinois," Editorial, Aug. 25). Never forget, though, that the ultimate benefit of trade lies not in what people must sacrifice-not in the creation of opportunities to produce output for others-but in the greater quantity, quality and variety of goods and services that free trade makes possible for ordinary people to consume. Free trade's bountiful harvest is not its exports; it is its imports.
Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Fairfax, Va.
Posted by Don Boudreaux in Trade | Permalink
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Comments
My brother once said that he would like to get a bumper sticker that said, "Support Your Dock Workers -- Buy Imports!" Aren't dock workers high-paying union jobs too?
Posted by: Troy Camplin, Ph.D. | Sep 2, 2007 1:43:07 PM
In a free, closed domestic economy, high wages will tend to reward the ability to produce goods which best reflect the values of domestic consumers and assign purchasing power differentially as a result.
In contrast, high wages in the production of export goods differentially assign domestic purchasing power for satisfying the valuations of foreign consumers or entities.
Regards, Don
Posted by: Don Lloyd | Sep 2, 2007 4:05:00 PM
Exports are what we pay for imports.
Posted by: Sam Grove | Sep 2, 2007 7:21:50 PM
Exports are costs?!?! I must be an economic illiterate, because that doesn't make any sense at all to me. I blame my ignorance on Carl Menger and the rest of the Austrians, who taught me about the subjective theory of value.
Posted by: David Johnson | Sep 2, 2007 8:19:48 PM
Great point, one that is often lost in the bumper-sticker economics that seems to be pervasive these days.
Posted by: Shaun Connell | Sep 2, 2007 8:54:28 PM
Exports are costs?!?! I must be an economic illiterate, because that doesn't make any sense at all to me.
Providing that this is not sarcasm, let me explain. If you put yourself in the shoe of the foreign importer then it does seem kind of bizzare that the exported good or service is a cost to the seller...after all, you, as the importer would probably be providing the currency to complete the transaction.
Now, put yourself into the shoe of the exporter/producer(or trade merchant). You have either produced the good or service or have aquired the good or service for some nominal amount. When you sell, you expect to recieve currency and your cost to get that currency is the good or service that you had possession of and now must relinquish. You don't realistically expect for someone to give you their currency without having to give up something for it in return, do you?
Even if you made whatever it is that's being exported, there were real costs that went into it (time, capital, labor, any other resource you can think of). This is why on a company balance sheet they have the line item titled "cost of goods sold", which subtracted from the revenue, is "gross profit". Even in the unlikely event that the "cost of goods sold" in your exporting business is negligible because it takes very little of your precious resources to make or create, you could still think of selling it (whatever "it" is) as a cost to get that currency. Why? Well, because once it is sold, you no longer have it (or rights to it) and therefore cannot sell it to someone else...it is a subtraction from you assets ledger and your direct cost for getting the hard currency.
Posted by: LowcountryJoe | Sep 2, 2007 10:16:26 PM
"Exports are costs?!?! I must be an economic illiterate, because that doesn't make any sense at all to me. I blame my ignorance on Carl Menger and the rest of the Austrians, who taught me about the subjective theory of value."
I'm having a little bit of a problem understanding this as well. Here's my take on Don's position, I don't know if this is right, but this is how I look at it... If you make something and export it, you now have foreign currency and no goods any more. From a nation's view (not the individual) this is a loss, because you now have to buy something with that foreign currency. They (the nation that bought your stuff) now not only have the goods you made, but you will have to buy something from them as well. If it stopped there, it really would be a loss, but my confusion with Don's stance lies in the fact that it doesn't stop there. The country that exported the stuff will now import from the other country and therefore the other guy has the "problem" now. I'm not sure why this wouldn't cancel out over a long enough time frame. Surely the Chinese, whatever domestic economic problems they have, have done very well incurring these "losses" due to exports. If exports are a loss, how has their economy grown so much while engaging in nothing but costly behavior? I'm confused...
Isaac Crawford
Blogging in Yemen
www.isaharr.com
Posted by: Isaac Crawford | Sep 3, 2007 6:38:47 AM
Isaac,
If you sell goods to nation X there is no reason that you must accept their currency, one would simply specify that if you desire to buy then you must pay in dollars.
This is why there is a currency of choice as a standard in international dealings.
If I sell to France, the french convert their francs to dollars and pay me. If I buy from France, I convert my dollars to francs and pay them, but the dollar remains as the standard in both transactions.
Having made the trade and received your dollars, you can now turn around and buy goods from a completely different country.
This trade is going on all the time between countries.
I can't say I understand the system well enough to teach it, but I do understand it enough to know that if I fail, or do not receive satisfaction in my trades, then the markets, global trade, or free trade wasn't the reason. The reason was my own ignorance and lack of negociating skills.
Posted by: vidyohs | Sep 3, 2007 8:55:08 AM
It seems pretty obvious to me that exports represent costs. These exports represent the labor, material, capital rent, and investment return costs of firms that export. The currency that these firms receive is the other side of the equation.
What firms - or nations - do next with that currency represents another equation. Some currency is used for immediate consumption, some for deferred consumption. China has apprently elected to hold some of its currency gains for deferred consumption. I do not understand their rationale for doing so, but it doesn't bother me. If they want to assume the risk of holding on to dollars, that's their business.
Posted by: John Dewey | Sep 3, 2007 9:09:33 AM
OK, but that just shifts the burden of doing something with the foreign currency to someone else. I understand that trade happens, that it is mutually beneficial, and that there are exports and imports. I don't really understand how we can go from trade being mutually beneficial to exporting being a "cost." That is where my confusion lies.
Isaac Crawford
Blogging in Yemen
www.isaharr.com
Posted by: Isaac Crawford | Sep 3, 2007 9:09:53 AM
Isaac Crawford: "Surely the Chinese, whatever domestic economic problems they have, have done very well incurring these "losses" due to exports. If exports are a loss, how has their economy grown so much while engaging in nothing but costly behavior?"
Isaac, I think China has done more than just engage in the "costly behavior" of exporting. Sorry that I don't have time this morning to find the statistics for you, but I'll provide them later. I'm fairly certain that China's imports of goods, services, and capital have increased dramatically at the same time their exports have risen so much. Yes, they do have a positive current accounts balance. But they also import large amounts of material for producing goods, such as energy and semiconductors.
It seems to me the people of China could realize even greater current consumption if they purchased goods with the dollar currency they choose to hold. But I don't understand the purpose of holding currency reserves, so I could be oversimplifying the case.
By the way, the "fear" that China may dump its dollar currency reserves seems strange to me. If they did that, the value of that currency - which I understand to represent deferred consumption of the Chinese people - would plummet. Why would China reduce the value of the deferred consumption of its people?
Posted by: John Dewey | Sep 3, 2007 9:18:39 AM
Of course exports are costs. If I make a motorbike, and then send that motorbike abroad, I no longer have a motorbike. I have incurred a cost. I do have some foreign curruncy though, but this is just worthless pieces of paper. Maybe, just maybe, I could swap this foreign currency (which is otherwise worthless to me) for some foreign goods, say, a car. Since the car is abroad (the only place I can spend my foreign currency) I would of course need to import it. Once I do so, I recieve the benefit (opposite of a cost) of a car. Thus, exports are the cost, imports the ultimate benefit.
Posted by: Simon Clark | Sep 3, 2007 9:20:14 AM
Once I do so, I recieve the benefit (opposite of a cost) of a car. Thus, exports are the cost, imports the ultimate benefit."
OK, that makes sense, and upon rereading the actual letter to the editor I understand. I think that the title of this post is what threw me off...
Isaac Crawford
Blogging in Yemen
www.isaharr.com
Posted by: Isaac Crawford | Sep 3, 2007 9:35:42 AM
Simon Clark,
Thanks for the very simple but effective explanation. Surely no one will remain confused.
Posted by: John Dewey | Sep 3, 2007 9:35:47 AM
To paraphrase and further simplify Simon:
Exporting is what you do every morning when you go to work.
Importing is what you do every evening when you go to the shop.
Most of us work (export) to shop (import); few of us work because we love to. That's why they call it work.
Posted by: To | Sep 3, 2007 10:41:36 AM
I don't really understand how we can go from trade being mutually beneficial to exporting being a "cost."
It's a matter of perspective. A shoemaker can only consume so many shoes, the farmer only so much food. It's the work they do in producing excess product for exchange that is the cost.
Posted by: Sam Grove | Sep 3, 2007 11:53:22 AM
I understand the points being made here, but I have two things which don't seem to fit into the frameworks being discussed here:
1) isn't the counterpoint that imports must be paid for, and exporting earns the foreign exchange required to pay for them. I realise an alternative means of 'payment' is via accepting inwards investment.
2) a number of Asian tigers (e.g. Singapore I believe) explicitly ran export-led growth strategies, and they seem to have worked. How does that fit with the "exporting is a cost" framework?
Posted by: ben | Sep 3, 2007 6:14:05 PM
1 That's another way of putting it.
2 They, in essence, are promoting work among their citizenry in order to pay for imports. Until we have completely automated production, work is the cost of survival.
Areas that have little in the way of natural resources have only one way to pay for their imports; labor added value.
The implicit thrust of this post is to counter critics of trade "imbalance". What they are really suggesting is that we should get less for OUR labors, because their focus is on jobs rather than consumption.
If we could have consumption without work, then no one would engage in "work". Work is the cost of consumption.
Posted by: Sam Grove | Sep 3, 2007 6:53:14 PM
ben,
I thought that Singapore's current account surplus was more the result of its capital account deficit. Singapore citizens chose to invest in foreign financial assets and purchase foreign companies rather than import goods.
As I understand it, Singapore's private sector was jolted by economic shocks four to eight years ago. To insulate itself from further shocks, the private sector increased its level of savings and reduced its level of consumption.
You can read a more complete analysis at:
Singapore's balance of payments - an analysis
Posted by: John Dewey | Sep 3, 2007 6:55:33 PM
Ben,
If we exported but did not import, we would be making a 100% loss. Sure, we get foreign currency but if we don't use it to import it's worthless, just bits of paper. Remember that money is just a tool we use to trade by proxy - the guy who wants to buy my motorbike doesn't have a car to give me, so he gives me a voucher that will get me the car somewhere else (money). When I export my motorbike and get money in return, and then use it to import a car, what I really did was trade a motorbike for a car. I'm better off, the guy who got the bike is better off, and the guy who I bought the car from is better off.
Posted by: Simon Clark | Sep 4, 2007 11:02:18 AM
Simon Clark,
Again, thanks for expanding your simple and effective explanation.
One fear of American protectionists seems to be that people of exporting nations will choose to purchase equity in U.S. firms rather than import goods. As I see it, the purchase of U.S. equities by Asian and other investors is just a form of deferred consumption. Eventually those foreign investors will cash in their U.S. financial assets and buy something. In the meantime, their investment in U.S. firms allows our economy to grow even faster. Does that make sense?
Posted by: John Dewey | Sep 4, 2007 11:14:02 AM
You guys are missing the point. If you export shoes and get foreign pieces of paper instead, it is because you VALUE those foreign pieces of paper MORE than the shoes! If exporting were a cost, no one would be exporting. This is as ridiculous as saying that selling shoes domestically is a cost, because all you get in return are green pieces of domestic paper.
Posted by: David Johnson | Sep 5, 2007 1:02:03 AM
If you export shoes and get foreign pieces of paper instead, it is because you VALUE those foreign pieces of paper MORE than the shoes! If exporting were a cost, no one would be exporting. This is as ridiculous as saying that selling shoes domestically is a cost, because all you get in return are green pieces of domestic paper.
We only accept the pieces of paper because we believe they will purchase what we want. The value represented by the pieces of paper are not directly consumable.
It's not the selling of shoes that is the cost, but the labor involved in producing and distributing them.
Productive labor is the cost of consumption. Exporting is the price we pay for imports. Our exports are someone else's imports and vice versa.
If you think currency is worth anything, try living on a deserted island with only cash. The value of currency lies in its flow through the economy. It is feasible to look at all trade minus the currency. In fact, releative to the goods that flow back and forth, there is probably very little physical curency exchange.
Posted by: Sam Grove | Sep 5, 2007 2:15:04 AM
David Johnson,
Selling shoes domestically is a cost too. When I sell you a pair of shoes I have one less pair of shoes than I did before. That's a cost. I do have pieces of paper, but I imported those from you so it's the importing I want. But nobody values money in and of itself (except maybe collectors), we value it only as a tool to get what we really want. When you buy my shoes and I use the payment to buy a coat from your neighbour, what really happened was I traded my shoes for a coat. The shoes were the cost, since I exported them to you, the coat is the benefit, which I imported from your neighbour.
Posted by: Simon Clark | Sep 5, 2007 11:22:19 AM
To put it most simply, my effort is my export, my consumption is my import.
People don't consume to provide a reason for working, they work because consumption is a condition of life.
Posted by: Sam Grove | Sep 5, 2007 2:31:13 PM
If those pieces of paper are valueless, then I will take them off your hands. I'll give you one shiny copper colored piece of metal for each one of those valueless green pieces of paper.
I am still sorely confused over this. My ignorance of economics is beginning to be embarassing. If exports are a cost and not a benefit, please explain why anyone would ever want to export? Is it some form of mass masochism? It sounds like an argument to put armed guards around the warehouses to make sure none of the inventory gets sold!
Posted by: David Johnson | Sep 5, 2007 4:08:15 PM
David,
I think if there were no medium of exchange - no money - this would be easier to understand.
Suppose I produce corn to trade for shirts, which I need. At the same time, a family in Nicaragua produces shirts to trade for corn, the good they need. We contact each other and trade 5 bushels of my corn for 10 of their shirts.
Can you see that producing the corn is my cost to obtain their shirts? and that producing the shirts is the Nicaraguan family's cost to obtain my corn? For me, corn is the cost and shirts are the benefit. For them, shirts are the cost and corn is the benefit.
But, of course, I'll never find exactly that family willing to make just that trade. So we both make use of a medium of exchange - dollars - in order to ease the task of matching our costs with our benefits. But just because money gets in the middle, we haven't changed the costs and the benefits for me. Corn is still the cost. Shirts are still the benefit.
No idea if this will help, but it once made it clear for me.
Posted by: John Dewey | Sep 5, 2007 4:49:09 PM
please explain why anyone would ever want to export?
Why would anyone ever want to work?
If those pieces of paper are valueless, then I will take them off your hands. I'll give you one shiny copper colored piece of metal for each one of those valueless green pieces of paper.
Let's go to that deserted island. I'll take food and you take green pieces of paper.
Let's wait a few days.
Posted by: Sam Grove | Sep 5, 2007 9:47:22 PM
oops
Posted by: Sam Grove | Sep 6, 2007 12:48:22 PM
please explain why anyone would ever want to export?
Why would anyone ever want to work?
If those pieces of paper are valueless, then I will take them off your hands. I'll give you one shiny copper colored piece of metal for each one of those valueless green pieces of paper.
Let's go to that deserted island. I'll take food and you take green pieces of paper.
Let's wait a few days.
Posted by: Sam Grove | Sep 6, 2007 12:49:50 PM
swear to god I closed the italics
Posted by: Sam Grove | Sep 6, 2007 12:50:24 PM
David Johnson,
It doesn't really matter whether the money is worthless or not, I imported the money. The cost was the export, the immediate benefit was the money I got in return.
So suppose we regarded imports as a cost, exports as a benefit. And let's say we don't regard money as a good: so we export goods, import money, but nothing else. We'd be making a 100% loss on everything we exported because without imports to buy, the foreign currency we would get is worthless.
With exports and imports both, we can incur the cost of exporting goods in order to get the foreign currency we need to get the benefit of imported goods.
Posted by: Simon Clark | Sep 6, 2007 2:26:57 PM
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