May 20, 2024 

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TRADE DEFICIT: Formally termed a balance of trade deficit, a condition in which a nation's imports are greater than exports. In other words, a country is buying more stuff for foreigners than foreigners are buying from domestic producers. A trade deficit is usually thought to be bad for a country. For this reason, some countries seek to reduce their trade deficit by--(1) establishing trade barriers on imports, (2) reducing the exchange rate (termed devaluation) such that exports are less expensive and imports more expensive, or (3) invading foreign countries with sizable armies.

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THIS MEANS WAR!! Batten down the hatches. Circle the wagons! Sound the alarm! Head for the fallout shelter! Those seemingly quaint and courteous folk from the Republic of Northwest Queoldiola have upset the delicate balance of world peace. Perhaps I should explain. A group of investors from Northwest Queoldiola have been snooping around Shady Valley with the evil intentions of buying Shady Valley's very own Sonny Sullivan Sundials Extraordinaire manufacturing plant. How dare they! This is the good old U. S. of A. We don't want any foreigners buying up good old U. S. of A. property, do we? Before nuking Northwest Queoldiola we should consider this potentially messy topic of foreign investment.

The Fine Art of Investing

In that "F" comes before "I", you might not yet have wandered across the entry on INVESTMENT. If you haven't this would be a good time to do so, because foreign investment is just a special sort of investment. A lot of the basics found under INVESTMENT are also useful here.

Let me hit some of the high points:

  • Investment means giving up current consumption goods to produce some sort of capital goods that will (hopefully) enhance future production. You sacrifice something now for more later.

  • This "more that you get later" is the return on the investment. Most businesses measure return in terms of extra profit. The trick to investing is selecting the capital with the greatest return.

  • The return on capital is weighed against the return that could be had from the financial markets. A business could use that extra gadzillion dollars it has laying around for capital or an array of corporate stocks, bonds, government securities, or whatever. The capital route is better if it has the highest return.

  • Following a similar thought pattern, it's also wise to borrow the money needed to invest in capital if the capital return is greater than the interest rate on the loan.

As a general rule -- and the one that's most important here -- investment monies search out those opportunities with the highest return. It could be the stock market, government securities, renovating an office building, building a new factory, or buying an existing one. And (here's one of those important "ands") investors are more interested in the "how much" than in the "where." However, the "where" often puts us into the realm of foreign investment.

Buying Up Another Country

Foreign investment is as much a part of U. S. history as Christopher Columbus, westward expansion, and every "war to end all wars" that we've ever fought. Our original 13 colonies were begun as foreign investment by European countries. Although we've been independent for a couple of centuries, we still have significant foreign ownership of U. S. property. Britain, France, Canada, and others have long found U. S. capital to be extremely worthy of their investment dollars.

The newsguys tend to be most interested in the topic, however, when one of our primary competitors in the global economy goes on a U. S. property buying binge. In the recent past we've had concerns about Saudi Arabian and Japanese ownership. How dare they! Now Shady Valley is faced with those supposedly quaint and courteous thugs from Northwest Queoldiola. Let's get to the bottom of this.

A Great Place to Invest

Put yourself in the position of investors from Northwest Queoldiola who are searching for a good investment. Their search has lead them to Sonny Sullivan's Sundials Extraordinaire factory. Of all potential investments in factories, buildings, equipment, stocks, bonds, government securities, or whatever around the globe, they've selected the Sonny Sullivan's Sundials Extraordinaire factory right here in Shady Valley. I wonder why?

The most likely reason is that they think the Sonny Sullivan's Sundials Extraordinaire factory is the most profitable use of their investment money. That speaks volumes of good about the Sonny Sullivan factory and it's workers. It also says a lot about foreign investment in general. A country with a great deal of foreign investment must be a relatively productive nation, profitably producing the stuff that people want to buy.

To illustrate, let's say that our Northwest Queoldiolan visitors have a million dollars to invest. They could buy or build a sundial factory in their home country of Northwest Queoldiola. Calculations show that this investment will net $100,000 each year in extra profit -- working out to a 10 percent return on their million dollar investment. A quick look at Sonny Sullivan's books, though, reveals that it generates $200,000 in profit a year. This would give our Queoldiolan investors a 20 percent return on the million dollars. What would you do in their shoes? I'd probably buy the Sonny Sullivan factory.

Why is make Shady Valley's favorite sundial factory more profitable than the Northwest Queoldiola alternative? Here are a few possibilities:

  • Lower cost. Shady Valley's factory might produce sundials more cheaply because wages, material prices, taxes, or any number of other cost items are less. An important cost item is transportation. If the Shady Valley is located closer to the market than Northwest Queoldiola, then the cost of shipping sundials is lower.

  • Greater revenue. It's also possible that revenue is greater for sundials produced in the Shady Valley factory. The Sonny Sullivan's Sundials Extraordinaire name could command a higher price because it's widely recognized for quality.
Money, Money Everywhere

Something else could be behind the Northwest Queoldiolan's interest in our Shady Valley factory -- foreign exchange. Here's the catch -- the Shady Valley factory investment is made in U. S. dollars while any similar investment made in Northwest Queoldiolan is with their own currency, queolds. The Queoldiolans might be interested in buying up Sonny Sullivan's Sundial factory because they have a bunch of U. S. dollars that they're looking to spend on something in the United States.

Where did they get these U. S. dollars? Here are two possibilities:

  • One, they could have sold the United States some goods produced in Northwest Queoldiola -- perhaps some imports that came right here to the citizens of Shady Valley.

  • Two, some U. S. companies could have made capital investments of their own in Northwest Queoldiola. (According to Winston Smythe Kennsington III, Omni Conglomerate, Inc. recently completed an OmniMotors XL GT 9000 sports coupe assembly plant in Northwest Queoldiola.)

In both cases, U. S. citizens spend U. S. dollars on stuff of Northwest Queoldiolan origin. When the Queoldiolans get these dollars, they return the favor by buying stuff of U. S. origin -- in this case Sonny Sullivan's factory.

The Best Price Around

The Northwest Queoldiolans might also be interested in buy Sonny Sullivan's factory, whether or not they have any extra U. S. dollars, because of the exchange rate between dollars and queolds. While you might want to run through our little pedestrian look at this topic under the heading of EXCHANGE RATE, such is not crucial. The important thing to note about the exchange rate is that different countries use different currencies and they're frequently traded for one another. The price of one currency in terms of another is the exchange rate, which like other prices rises and falls from changes in demand and supply. Exchange rate (price) changes can then affect foreign investment:

  • Cheap dollars. If the price of dollars, in terms of queolds is low, then Northwest Queoldiolan investors can buy a lot of dollars with relatively few queolds. Their money goes further in the United States than in Northwest Queoldiola. This gives them the opportunity and incentive to buy American -- especially Sonny Sullivan's Sundials Extraordinaire factory.

  • Expensive dollars. On the flip side, if the price of dollars in terms of queolds is pretty high, then it takes a bunch more queolds to buy U. S. dollars. Their money goes further in the Northwest Queoldiola than in United States. This discourages foreign investors from seeking opportunities in places like Shady Valley.

A number of countries, the United States included, keep a close eye on exchange rates, and even try to get them up or down as a means of encouraging or discouraging foreign investment. The reasons for this should become clear with a look at the good and bad of foreign investment.

Who Owns What? And So What?

Here are two of the most publicized concerns of foreign investment:

  • Control. When another nation owns part of "our" property it takes away some of our control. Foreign owners, being foreign, may not do things that are necessarily "good" for the country. Their number one concern is a financial return. Forget the civic responsibility stuff, just take the profit and run.

  • Income. The profit and income from foreign-owned capital goes back to the foreign owners, which they're likely to spend on consumption in their own country. This can be a drain on the domestic economy, which then has all sorts of consequences for the multiplicative, cumulatively reinforcing (whew!) circular flow -- fewer jobs, less income, unemployment, recessions.

Now for the good part of foreign investment:

  • A healthy economy. First, foreign investment is usually a sign of a productive, expanding economy. If foreign countries are willing to spend their investment bucks here, then they must be expecting good things from the country.

  • A source of growth. Second, you must never, ever, never forget that capital investment is a key to the economic growth that expands the size of our economic pie. When you add foreign investment to domestic investment, our pie expands just that much faster, with all of the good things that result. We get more jobs, income, production, consumption, goods, and a lot of other stuff.

Unless foreign investment is (1) excessive and most of the country is owned by foreign types, or (2) in strategic, national defense sensitive capital, it's not all that bad. After all, most hardworking, taxpaying consumers are employed by second estate owners from another part of the country. Does it matter if your paycheck is signed by someone who lives in Northwest Queoldiola, Japan, New York, or California? The most important thing is to have a signed paycheck.

As the Northwest Queoldiolan investors finalize their purchase of the Sonny Sullivan's Sundials Extraordinaire factory, let's wrap up this entry with a few foreign investment tips:

Investment Tips, Foreign Style

  • Keep in mind that foreign investment is a symptom or indication of what's going on in the economy. A really dumb knee-jerk reaction is to prevent foreign investment just for the sake of preventing foreign investment. Foreign investment is a sign of good times and often helps the goods times continue.

  • If you have some spare investment cash of your own laying around, you should consider this foreign investment option as well. There are a number of mutual funds that specialize in investments in other countries. They're risky, but can be rewarding to your bank account.

  • We probably should draw the line on foreign ownership of some sorts of capital, such as military installations, that would put us in a vulnerable defense position, or historical landmarks, that might not be fully appreciated by those with a different culture and heritage.

Borrowing Through The FINANCIAL MARKETSxxx The Wide, Wide World Of FOREIGN TRADE


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