I Beat a Regrettably Immortal Horse

by Don Boudreaux on July 2, 2012

in Balance of Payments, Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to the Washington Post:

Steven Pearlstein writes that the economic theory in support of free trade “is based on a number of assumptions, one of which is that trade is reasonably balanced – that once we started importing more goods and services from the rest of the world, the rest of the world will use that extra income to buy equal amounts of goods and services from us” (“Outsourcing: What’s the true impact? Counting jobs is only part of the answer.” July 2).

Not so.

Suppose an Italian earns a total of $2,000 selling shoes to Americans.  He then uses that $2,000 to buy, not goods and services from America, but shares of stock on the New York Stock Exchange.  This transaction results in us Americans selling fewer goods and services to that foreigner than he sells to us – a perfectly normal possibility.  Because economists have long understood that people can invest abroad (rather than just import from abroad) – and long understood also that investment opportunities can expand indefinitely – absolutely nothing in economic theory predicts that a country’s exports will be equal in value to that country’s imports.  And moreover, nothing in economic theory suggests that the economic well-being of a country depends upon any such ‘equality’ of exports with imports.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA  22030

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