I know some economists during the second half of the 20th century had the exact opposite view of the Mercantilist philosophy.
For example Mercantilism says a country should maximize exports and minimize imports as much as possible.
Meanwhile Milton Friedman, one of the most prominent economists of the 20th century, said that a country that had large amounts of imports with minimal exports was a very successful country. The idea being that such a country was essentially buying things from other countries at minimal cost.
Edit: The following link quotes something he said regarding this:
Regardless of current events: Both are looking at volume, when the nature of what's exchanged probably matter as much if not more.
If a country massively imports raw materials and exports a low but steady volume of high level finished products, as long as the raw materials are reasonably cheap it will be a winning strategy.
A country importing high technology goods and balancing that with raw resources will potentially be in a worse condition if raw materials stay a commodity or deplete.
Any of the maximize or minimize arguments are going to be simplistic and reductionist. The optimal real world strategies are always going have to account for other factors like relationships, political stability, goal alignments, power/dynamics, etc, etc. These factors will be different for each nation you're dealing with and will greatly affect what the best import/export and tariff ratios should be. And these may also change over time. The importance of these factors (different for each nation) are so strong as to overwhelm any of the economist theories about maximize/minimize.
Friedman was not saying we should maximize imports. Instead he was saying we should maximize the ratio of imports to exports. Essentially to get as much stuff from others (imports) while paying as little as possible (via exports).
”And the proper objective for a nation as Adam Smith put it, is to arrange things so that we get as large a volume of imports as possible, for as small a volume of exports as possible.”
With that said. He appears to be arguing for colonialism. Take stuff from others and pay a pittance for it.
There's also the tautological paradox where price is defined by trade, so the trade balance will always be equal by any measure, if country A exports 1T bushels of wheat and country B exports 1 computer chips, we subjectively know who is winning in the exchange, but it will tally up to equal values in the balance sheet.
I think many economists would argue that both countries are winning in this exchange. Many would argue that such a transaction would be an example of a “positive sum game” where each side gains more than they lose.
Oh yeah that trade can be positive sum is a given.
And that most trade is generally positive sum is also a quite reasonable take that we seem to share.
That said, even if a trade is positive for both parties, the surplus/profit of a trade might not be (and mathematically almost never is) 50/50.
In the example outlined 1B wheat for 1 computer chip might be positive for both countries, but everyone would agree that the exporter of 1 chip is getting the better end of the positive sum trade.
>a country having enough money to import without export?
there's no such thing. when you import, you send your currency overseas to pay for the goods. There is nothing they can do with your currency except send it back to you by buying things from you, lending it to you, or making direct equity investments in your companies. (otherwise there is this huge growing pile of your currency accumulating overseas which drives down your purchasing power since it's in surplus)
not sure if Friedman said that, but he did know more about econ that me, and what I've said is accurate.
USD has no value other than what it can purchase in the US.
Saudi Arabia does not pile up USD, they pile up USD denominated investments.
(basic finance that most people don't realize: When you put money in the bank, and the bank gives you interest, that's not your money in the bank, that's the bank's money. What you own is a certificate entitling you to the stream of interest payments. If you ever want your money back from the bank, you need to give them back the entitlement for the interest payments, and the interest payments will stop.)
the Saudis don't hold US currency, they hold bonds, et al.
> USD has no value other than what it can purchase in the US.
Any currency has value for anyone—or, more importantly, any group of anyones—who gives it value. If a person in Botswana and a person in Namibia want to trade, and they're happy working in USD between each other, then it has value there.
any example token can have value, but will every example? no.
does the paper money of the US confederate rebel states have value? "any failed historical state's currency could have value to the people of Botswana" is not a useful idea.
Yes, I know, POWs used packages of cigarettes for currency, even those that had been passed around so many times that they were mush inside. I took econ too.
> When you put money in the bank, and the bank gives you interest, that's not your money in the bank, that's the bank's money. What you own is a certificate entitling you to the stream of interest payments
When you give money to a bank, the bank owes you money. You are a creditor and you technically own debt (which may or may not give interests). This debt is money.
The money supply is not a uniform things. It goes from actual paper money, through bank deposits which are more or less indistinguishable from paper money all the way to short term deposits and bonds.
Holding deposits and holding safe bonds is not particularly different. It’s more cumbersome to trade but it doesn’t significantly alter the reasoning about what you will be able to do with the dollars you have.
>When you give money to a bank, the bank owes you money. You are a creditor and you technically own debt (which may or may not give interests). This debt is money.
the bank does not owe you the money you put in, they owe you the interest payments.
look up "valuing a perpetuity", study the equations, that's how it works. If somebody owed you the interest payments and the money, your net worth (in regard to this money) would double. They only owe you the original money if you give back your rights to the interest payments.
I did study finance in grad school, I'm not making this up. I am using simplified language to stay focused on the simplicity of what is happening.
A bank account is not a perpetuity. You don’t need to use DCF to value it. Most current accounts don’t even actually give interests let alone an annuity you would need to discount. It is straight debt.
> If somebody owed you the interest payments and the money, your net worth (in regard to this money) would double.
Even for deposits, the way this works is that you discount future cash flow on top of your principal to get to your net present value. The NPV of a saving accounts above inflation viewed as a perpetuity is infinite thanks to the magic of compounding interests. Sadly, “in the long run, we are all dead”.
You must be using a different definition of “owe” than the rest of the world. By any layperson’s and lawyer’s definition, any money you deposit in a bank is definitely owed back to you. And it’s definitely placed in the liabilities column of their accounting books.
Any interest is certainly owed as well since it’s a consideration of a deposit agreement, but both are owed, not just the latter.
if what a dollar can purchase in the US changes, Eurodollars also change. tell me you don't know what "=" means without telling me you don't know what "=" means
In addition to what others said here, some countries, like Ecuador, use the USD as the official currency.
This entire thread smacks of ignorance. I encourage you all to take some basic university level macroeconomics courses before confidently spouting any more falsehoods about how international trade and finance works.
> when you import, you send your currency overseas to pay for the goods.
As a general rule, this is false. Mexican importers do not pay for U.S. goods in pesos. With few exceptions, importers have to sell their local currency on the market, exchange it for the exporter’s currency, and pay for the goods with that.
Some exporters will accept the importer’s currency as an accommodation, but they’ll just sell the currency to exchange it for their own, because they have to pay for everything at home with the local currency. If I were a U.S. exporter, I couldn’t pay for my groceries with Euros.
if you look at the net movements of currency, whether the buyer exchanges or the seller, or some third party or central bank, the net movement is the same and what I said is correct. When analyzing math problems you simplify things to be able to see what is happening more clearly; you are introducing complications as if they change what is happening, but they don't.
I minored in Econ at a top tier university. There is indeed math you need to know to understand economics, but economics is not a branch of mathematics. There’s also behavioral understanding as well as practical knowledge.
I would advise you to kindly take the L here and please stop trying to weasel your way around being wrong. People make mistakes; it’s how they respond when being confronted with their errors that demonstrates their character.
>>me: when you import, you send your currency overseas to pay for the goods.
>you: As a general rule, this is false. Mexican importers do not pay for U.S. goods in pesos
initial conditions: americans have only dollars. mexicans have only pesos.
american sellers demand to be paid in dollars. any mexican who wants to buy american goods must convert their pesos to dollars. where do they get dollars? see initial conditions, they must get them from americans by sending their pesos overseas.
it's that simple.
now, when you run these economies with several million people importing and exporting in both directions, sure, there would be dollars in mexico and pesos in america. but why would you complicate a simple analysis with all of those other transactions when the simple case influences the outcome in the right direction and makes it easy to see what's happening?
> any mexican who wants to buy american goods must convert their pesos to dollars. where do they get dollars? see initial conditions, they must get them from americans by sending their pesos overseas
This thread is over. I asked you to come back armed with references to support your claims and instead you continue to spout nonsense. Currency exchange simply doesn’t work the way you describe, full stop.
>Currency exchange simply doesn’t work the way you describe
currency exchange can work many different ways, but it can't violate thermodynamics or fundamental laws of physics. It also cannot violate the axioms of math, which is what I described.
If a Mexican wants dollars, they need to buy them from somebody who has them. Even if there are billions of dollars in Mexico, if Mexico is exclusively importing from the US forever (which are the conditions of the question above) those billions of dollars will be transferred to the US and Mexico will run out of that supply of dollars and will have to find some new way to get them from the US.
The exporter will acquire dollars from a currency trader who will sell dollars to them in exchange for pesos at the current market rate plus some premium. The currency trader will then find a buyer who wants pesos in exchange for some other currency. It’s all market based today, after the fall of Bretton Woods, which came after gold exchange as the basis of international payments for trade.
It might be that what you’re talking about is the balance of trade, which is related to, but not the same as currency exchange. But if that’s what you’re talking about, those are the words you should be using.
>It might be that what you’re talking about is the balance of trade, which is related to, but not the same as currency exchange. But if that’s what you’re talking about, those are the words you should be using.
it's not that I am talking about balance of trade, it's that the orignal question was about balance of trade:
>and what does Milton Friedman say about a country having enough money to import without export?
he didn't say "a person", he said "a country", that's balance of trade.
so I explained why, by looking at currency exchange, we see that a country cannot engage in perpetual importing without export
you say:
>The exporter will acquire dollars from a currency trader who will sell dollars to them in exchange for pesos at the current market rate plus some premium.
if a country contains no exporters, only importers, the market for dollars or pesos will continue to tilt more and more in one direction. You don't need to model a world market of currency trade to see this, imagine a market with no currency traders (a service industry) but instead a market where you have to do-it-yourself exchange of currency. you will see the same impossible situation of currency flow all in one direction that it essentially consists of printing money till it's worthless
we don't even need currency at all, I could base my argument on barter, but he said "a country having enough money" and money brings currency into the question.
USD remains the world’s reserve currency, and the primary currency of global trade. i.e., the exporter, paid in dollars, can also use those dollars to buy goods from other nations beside the US.
A country could mine gold, pay with it for imports, and never have this gold brought back.
Currently you can replace gold with oil: say, Saudi Arabia could literally exchange many things it imports to oil, which can be nominated in USD to accommodate for the fluctuating monetary price of oil, but could be nominated in barrels directly, in a barter trade. They won't see this oil back, even e.g. as plastics made out of it, and they're fine with that.
The US can (so far) replace the gold and oil with USD, in cash, investment, or even credit purchase form, because there's enough demand for US cash as a store of value and a currency to trade with non-US entities, and enough trust that the US is going to service its debt, so it's an investment. The US may (effectively) never receive much of these USDs it sends abroad back; they are still a good deal in an inflationary fiat-currency economy. This pump continues to work as long as things like Silicon Valley, Wall St, and the US military continue to be world-dominating in their respective areas. (And this is one reason why isolationism is a silly policy for the US, toxic for its economy.)
consider gold to be a commodity (easy to do, because it is), shipping it overseas, you're engaged in trade, exporting gold, importing stuff or foreign currency. But nobody holds currency, because "time value of money", you want to hold something that yields income.
Indeed! Money is a special kind of a commodity, at least initially. With fiat money, it's more complicated, but still. All trade is barter trade, in a sense.
Money, e.g. gold, has a very special quality: it's accepted in exchange for any goods. It's the ultimate "narrow waist" of goods exchange. This gives money a very special status among commodities.
OP mentioned a country, so not just the US, that is why I asked.
Edit: Alright, by reading the link, what Friedman means, I think, is that a country still need to export more than import, but should export just the minimum enough to pay for the imports. In volume (so I'd guess manufactured products not commodities).
There is another side of the ledger e.g. currency so the question is then how does a currency remain valuable when more has to be produced to keep buying things, as opposed to selling things.
US has been running a trade deficit for only the past 60 years, since the Nixon shock which is probably very related.
While on paper the US is per capita wealthier today I think that’s more to do with ponzi economics.
> While on paper the US is per capita wealthier today I think that’s more to do with ponzi economics.
It is still the most developed economy but with a healthcare and education expense bigger than any other country while the citizens still need to pay a fortune for it.
For example Mercantilism says a country should maximize exports and minimize imports as much as possible.
Meanwhile Milton Friedman, one of the most prominent economists of the 20th century, said that a country that had large amounts of imports with minimal exports was a very successful country. The idea being that such a country was essentially buying things from other countries at minimal cost.
Edit: The following link quotes something he said regarding this:
https://fee.org/articles/milton-friedman-the-way-we-talk-abo...