Tuesday, March 28, 2006

Nations Don't Trade

I've been on the road a lot lately. That means I haven't had the ability to post easily, and I have a lot of e-mail and blog-reading to get caught up on. It also means I end up with time to think. It doesn't necessarily mean I've thought things all the way through, just that I've thought about them.

During this road trip, I had occasion to hear students speak about the state of the economy. I've been amazed at the frequency with which trade issues have come up. Generally students don't speak about international trade. The frequency with which it has been mentioned made this all the more interesting.

What caught my attention is the belief among many students that the "government" or "big business" needs to do something to change the flow of trade. What has been totally absent is an understanding that the flow of trade will change only when individuals change their trading habits. Ultimately, it is individuals who trade, not nations or firms. Nations and firms are, as many economists will point out, convenient amalgamations, generalized combinations of individuals. And when these groups trade, it is the result of an individual's choice. And that individual usually makes the decision based on a belief that the goods or services bargained for will be resold to yet other individuals.

Trade balances are the net of all the purchasing information made by individuals (for themselves, their firms or their agencies) in the global marketplace. When your students choose to buy something, they influence that total. And they are the lynchpin for any continuity or change in the flow. For whatever they choose to do will impact on their real income, the basket of goods and services that they consume. That is the true measure of their wealth.

The classic classroom activity for this is the "inventory." Students can go home and inventory their room, their closet, or whatever. They can list the items, the nations of origin, and with a little research, the price of those items. They can then try to find substitute goods/services, the sources of those items, and the prices. They should then see if they can construct a totally domestic basket of goods/services, and whether or not they can get the same items, for the same price.

If the global market is working, chances are they will find that a totally domestic basket of goods will cost more than the international basket of goods. The choice is now theirs. Are they willing to pay more for certain products, and reduce the total goods in their basket, or not? They trade because, ultimately, they consume. It’s their money. It’s their basket of goods. It’s their choice.

As always, I welcome your comments.

Posted by TSchilling at 8:49 PM | Comments (0)

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