International Business – Why nations trade.

Why do countries trade with each other?

1. Another country has something we don’t have.

Raw materials; copper from Indonesia, bananas from Costa Rica.

2. Another country has something cheaper than we can buy it domestically.

Such as consumer electronics from Japan, steel from Korea.

3. We can sell our products abroad to increase our own sales and decrease our overall unit costs.  Boeing, by selling airplanes world wide, decreases the cost per plane.

The first two above are operations involving Importing, the third is Exporting.

The Balance of Trade is the difference between Imports and Exports for a country.

     Imports minus Exports =      Surplus if we Export more than we Import.

                                           Deficit if we Import more than we Export.

What this means is that if the value of the consumer electronics we are importing from Japan is less than the value of apples, etc., they are buying from us, there will be a net outflow of dollars to Japan. 

Over time there will be a big pile of dollars in Japan, and as we learned when studying Supply and Demand, a big supply means the price will go down – in this case, the value of the dollars will begin to drop, and consumer electronics from Japan will begin to cost more money.

Read the following discussion of the mechanics of foreign exchange:

The Market for Foreign Exchange – Read just this one page.

http://ingrimayne.saintjoe.edu/econ/Financial/ForeignExchange.html

In the example in the paragraph before you went to the web link, we were talking about how the Balance of Trade affects exchange rates and prices of consumer electronics.  In an unregulated world the next thing that might happen is that since the dollar is weaker, Japanese consumers should be able to buy more American goods because they can get more dollars for each of their Yen.

In theory, the equation would balance out – Japanese consumers would buy so many products from the US with their valuable Yen that eventually there would be a big pile of Yen in the US that paid for all of these products.  The value of the Yen would begin to drop, and soon Japanese products would begin to get attractive again.  And so it goes, back and forth, with each consumer society benefiting by having the goods and services of the other country available.

International Trade does not happen so smoothly!