Trade Deficits
This, in addition to being a little politically motivated, also shows another aspects to trades and exchanges between countries that is another interesting aspect to take into account. This is the idea of trade deficits. Take a world where two countries are trading. One country makes cars while the other makes bananas. Suppose CarNation buys $1 million worth of bananas from BananaNation, and BananaNation buys $2 million worth of cars from CarNation. BananaNation now has a $1 million trade deficit, while CarNation has a $1 million trade surplus.
To deal with this deficit there are multiple options. CarNation can keep the money at home, which will cause the currency to rise. CarNation can also invest the money back into BananaNation, through stocks, bonds, investments, or directly buying assets. When the latter happens, it makes borrowing money cheaper, and stocks generally rise.
This is an interesting aspect of trades that has not been seen. In class, the only thing that has been seen in trades is direct values. This is obvious when considering two people, but it shows that one should be wary when extending this theory to countries. There are many unforeseen factors into the “power” of a country in the deal. In class, this was strictly based on access to other deals. However here, there is the desire for a country to have a specific item. There is also the fact that having an unbalanced deal is not necessarily negative for either country. These characteristics of trade also be applied downwards, towards smaller deals. Here, power can be very dependent on the each party’s desire for a certain item, just like the countries.