Thursday, July 31, 2008

Buy foreign-made

Another economist takes up the challenge of explaining to the Greens why trade deficits don't matter.  Explains Paul Walker,

    I just wish to make the simple point that "imports are good; exports are bad". Not an idea I think [the Greens'] flog blog would go for.
    Why? Well, notice that Adam Smith pointed out more than 240 years ago that "Consumption is the sole end and purpose of all production" and that the measure of a country's true wealth, is the total of its production and commerce. That is, a country's wealth is what the people of that country can consume. Note also that exports are things that we produce and send to other (overseas) people. That is, they are goods and services that we produce but do not consume and thus they lower our welfare. Imports on the other hand, are goods and services that other counties produce and send to us to increase our consumption. This means imports increase our welfare. So imports are welfare increasing and exports are welfare decreasing. Therefore "imports are good; exports are bad"
    But this does raise the question of why do we bother to export and not just import? The obvious answer is that exports are the way we pay for our imports. If we want people to send their goods and services to us we have to send our goods and services to them in exchange. Adam Smith also noted that in any free exchange, both sides must benefit. The buyer profits, just as the seller does, because the buyer values whatever he gives up less than the goods he obtains. That's why we trade at all.

That's right.  As Ludwig von Mises pointed out just fifty years ago, "The inhabitants of the Swiss Jura prefer to manufacture watches instead of growing wheat. Watchmaking is for them the cheapest way to acquire wheat. On the other hand the growing of wheat is the cheapest way for the Canadian farmer to acquire watches.” In the same way, the cheapest way for us to acquire electronic goods is producing lots of high quality milk and cheese, and keeping tourists happy. 

Read Paul Walker's whole explanation here if you'd like to be better informed than Russel Norman.

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