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Answering a Question

Posted By Don Boudreaux On December 16, 2010 @ 12:45 pm In Balance of Payments,Trade | Comments Disabled

Mr. Richard B__________:

Thanks for your e-mail.

You write about my latest column in the Pittsburgh Tribune-Review [1]:

Help me out here, please.  Your examples typically show the Toyotas in turn spending that $20K on something American.  What if Toyota decides to invest that $20K in China Air?

Good question.

To invest that $20,000 in China Air, Toyota would likely first convert those dollars into yuan and then use the yuan to invest in China Air.  The question then to ask is: why did a holder of $20,000 worth of Chinese yuan part with such a sum in exchange for U.S. dollars?  The answer is that that yuan-seller (or someone else to whom he can sell his dollars) wants to buy goods or services from Americans or to invest in America.

(If the seller of China Air shares accepts Toyota’s dollars directly in exchange for those shares, the same analysis in the previous paragraph holds.)

The point is that foreigners accept U.S. dollars in exchange for their wares for the very same reasons that Americans accept dollars: to spend them, invest them, or hold them.  Whatever might be the merits or demerits of any of these three ways to use dollars, there’s nothing about an exchange taking place across a political border that makes it special or uniquely deserving of measurement or attention, or of applause or disdain.

Don

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