AEI Exports are the goods and services we have to give up to get imports, which means exports are a cost, NOT a benefit Over at the Cafe Hayek blog, in a series of posts Don Boudreaux has been patiently and repeatedly trying to explain to several of his readers and correspondents in a series of blog posts the simple and straightforward concept that “exports are costs.” Here are the links to three of Don’s posts and some excerpts: 1. On Exports Being Costs That exports are costs is proven by this fact: people export only because, and only insofar as, they expect to get in exchange for their export earnings things of value. Because all exporting will stop if people come to expect that they will no longer be able to convert their export earnings into real goods and services, people thereby
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Over at the Cafe Hayek blog, in a series of posts Don Boudreaux has been patiently and repeatedly trying to explain to several of his readers and correspondents in a series of blog posts the simple and straightforward concept that “exports are costs.” Here are the links to three of Don’s posts and some excerpts:
That exports are costs is proven by this fact: people export only because, and only insofar as, they expect to get in exchange for their export earnings things of value. Because all exporting will stop if people come to expect that they will no longer be able to convert their export earnings into real goods and services, people thereby reveal that the exportation of the goods and services is, to them, costly. In summary, exports are a cost to each exporter in the same manner that going to work each day is a cost to each worker. Worthwhile, yes. But it’s done only because the receipt of greater value is expected in return.
If you still disbelieve me, ponder this fact: if the act of exporting is itself the ultimate end – the true benefit – of trade, then we Americans can make ourselves fabulously rich by every hour producing mountains of goods, loading these goods onto cargo ships, and then dumping all the cargo in the middle of the ocean. Only if you believe that dumping cargo in the middle of the ocean paves a sure path to prosperity do you truly believe that the act of exporting is itself a benefit (rather than a cost incurred in payment for the benefit called “imports”).
I confess to being repeatedly mystified by how many people find baffling what seems to me to be a reality too obvious for words. But it is not my place to criticize other people’s understanding; all I can do is to try again and again and again to improve my explanation of this central and important truth.
MP: Let me try to help Don out explaining what should be a fairly obvious and simple concept that exports are indeed costs and not benefits. Let’s start with a quote from Shlomo Maital’s excellent book Executive Economics: Ten Essential Tools for Managers:
Economists have a curious way of defining and measuring costs. Rather than ask: What does it cost me? or How much do I have to pay for it? Economists insist on costing things by framing the question as, What do I have to give up in order to get it? This rather strange phrasing, it turns out, has great analytic power for those who make regular use of it.
In an email to Don and using Maital’s framing of the concept of cost above I suggested we could replace the phrase “exports are the cost we pay to get imports” (which seems to be a confusing stumbling block and barrier for Don’s correspondents and critics that prevents them from understanding the simple economic logic) with the phrase “exports are what we have to give up to get imports.” Likewise, Don’s time, expertise, and teaching services are what he has to “give up” (which is a cost to him, not a benefit) to get a monetary salary from George Mason University (which is a benefit to him), and $25 is what Don would have to “give up” (which is a cost to him, not a benefit) to acquire the benefit of a restaurant meal (Don used both of those examples).
I suggest that replacing the phrase “exports are a cost” we have to pay to get imports with the phrase “exports are the goods and services we have to give up” to get imports might convince some of Don’s critics of the correct way of thinking about exports as costs and imports as benefits. Surely even Don’s critics couldn’t deny the simple fact that exports are “goods and services that we Americans have to give up” to foreigners? And if Americans have to give up those exported goods and services, that’s the same as saying that those exports are indeed a cost and not a benefit! Q.E.D.
But if neither Don nor I can convince the skeptics of the “reality too obvious for words” — that exports are a cost, not a benefit – let’s bring in Milton Friedman for some reinforcement. In the video below that was featured on CD in 2012 Friedman discusses international trade (starting about 20:42) and explains why “exports are a cost of getting imports.”
In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports, and if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad, we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, with automobiles we can drive, with all sorts of nice things for us to use.
The gain [benefit] from foreign trade is what we import. What we export [give up] is a cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things so that we get as large a volume of imports as possible, for as small a volume of exports as possible.
This carries over to the terminology we use. When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of our well-being, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in. Each of you in your private household would know better than that. You don’t regard it as a favorable balance, when you have to send out more goods to get fewer coming in. It’s favorable when you can get more by sending out less.