Question

#12 Summarize and Explain the Economic Situation:

Exceeded only by the pathological dread of imports ' that affects all nations is a pathological yearning for exports. Logically, it is true, nothing could be more inconsistent. In the long run imports and exports must equal each other (considering both in the broadest sense, which includes such "invisible" items as tourist expenditures and ocean freight charges). It is exports that pay for imports, and vice versa. The greater exports we have, the greater imports we must have, if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports we can have no exports, for foreigners will have no funds with which to buy our goods. When we decide to cut down our imports, we are in effect deciding also to cut down our exports. When we decide to increase our exports, we are in effect deciding also to increase our imports.

The reason for this is elementary. An American exporter sells his goods to a British importer and is paid in British pounds sterling. But he cannot use British pounds to pay the wages of his workers, to buy his wife's clothes or to buy theater tickets. For all these purposes he needs Amer- ican dollars. Therefore his British pounds are of no use to him unless he either uses them himself to buy British goods or sells them to some American importer who wishes to use them to buy British goods. Whichever he does, the transaction cannot be completed until the American exports have been paid for by an equal amount of imports.

The same situation would exist if the transaction had been conducted in terms of American dollars instead of British pounds. The British importer could not pay the American exporter in dollars unless some previous British exporter had built up a credit in dollars here as a result of some previous sale to us. Foreign exchange, in short, is a clearing transaction in which, in America, the dollar debts of foreigners are cancelled against their dollar credits. In England, the pound sterling debts of foreigners are cancelled against their sterling credits.

Answer 1

Solutoin : The presented scenario explains "Terms of Trade " and the " Balance of payment " . It is the ratio of price of exports to the price of imports which is represented by the concerned price indexes. When imports = exports, we balanced trade. When imports > exports, we have trade deficit and when exports > imports, we have trade surplus

When we export we earn the foreign currency which is used to pay our imports. So our imports and exports keep offsetting the balance payments between the 2 countries involved.