Fun Video: All about Trade and Exchange Rates Video Lecture | Macroeconomics- Learning and Analysis

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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