Not a Zero-Sum Game - Ludwig von Mises Institute

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Foreign Exchange Comments on Trade between "Countries" ountries cannot trade. Only people can exchange their prop- C erty rights. Even when many participants are involved in a market where many products are traded, each successive trade is between a seller and a buyer no matter how many middlemen are involved along the way. Intermediation by agents (middlemen) only comes about when it facilitates trade and thus saves money to the participants. Usually countries have their own currency. Hence, in order to buy goods and services from a foreign country, a person must first purchase its domestic currency. Likewise, if one sells in a foreign country payment will be in their local currency. Therefore, a market for the currencies (the foreign exchange market) will emerge. The supply and the demand of currencies will determine their price in terms of each other; that is, the "rate of exchangev-just like when we purchase four five-dollar bills with a twenty dollar bill. When we exchange one dollar bill for one hundred and twenty yen, the exchange rate will be one to one hundred and twenty.
NOT A ZERO-SUM GAME The exchange rate (the parity) will reflect the approximate purchasing power of each currency in terms of the other, in the same way that the four five-dollar bills purchase the same as the one twenty-dollar bill. This equivalent purchasing power is called the purchasing power parity (PPP). It would be the only determinant of exchange rates if other factors did not affect the supply and demand of foreign currencies; because, after all, it is supply and demand that determines the price of things. Other factors that influence demand and supply of foreign currencies are capital flows from cross-country investments, international credit trans- actions, family remittances, foreign aid and capital flight. The political place of residence of the provider of the goods being traded is irrelevant because a foreign supplier simply will not ship the goods if the domestic importer does not have the wherewith- al to pay; that is, if he has not bought the required foreign currency from the domestic country's exporters. When the demand for foreign currency increases (or decreases), its price will just go up (or down) like any other good. Whether trade is domestic or international, it allows everyone to share the savings brought on by increases in the productivity of others. This sharing occurs because, as people reduce their own costs through trade, their enhanced purchasing power allows them to buy other things, at home or abroad, or to pay more to others for what they want. When we purchase, we are in effect outbid- ding other buyers. The more we save, the higher we can bid. How FOREIGN EXCHANGE RATES (PARITY) WORK For trade to occur between people in different countries (or different areas of the same country), the relative prices must be
Page 2: I I E ~ nn E i~ hn $hat f!ze Laao n
Page 5 and 6: A short version of this essay, enti
Page 8: Acknowledgments Many thanks for the
Page 11 and 12: NOT A ZERO-SUM GAME Table of Conten
Page 14 and 15: Foreword by Donald Boudreaux THE PA
Page 16 and 17: Foreword by Roger Miller THE PARADO
Page 18: THE PARADOX OF EXCHANGE Law and Eco
Page 21 and 22: NOT A ZERO-SUM GAME specialization.
Page 23 and 24: NOT A ZERO-SUM GAME Sir William Bla
Page 25 and 26: NOT A ZERO-SUM GAME It is not clear
Page 27 and 28: NOT A ZERO-SUM GAME the game is ove
Page 29 and 30: NOT A ZERO-SUM GAME increase produc
Page 31 and 32: NOT A ZERO-SUM GAME why it behooves
Page 33 and 34: NOT A ZERO-SUM GAME We will measure
Page 35 and 36: NOT A ZERO-SUM GAME Obviously, when
Page 37 and 38: NOT A ZERO-SUM GAME managerial abil
Page 39 and 40: NOT A ZERO-SUM GAME It is true that
Page 41 and 42: k %&> Trade as a Distributor of Wea
Page 43 and 44: NOT A ZERO-SUM GAME up getting stuc
Page 45 and 46: NOT A ZERO-SUM GAME Only competitor
Page 48 and 49: Epilogue Property Rights Matter In
Page 52 and 53: different in each place. Although t
Page 54 and 55: PART 11 COMMENTS ON TRADE BETWEEN "
Page 56 and 57: PART 11 COMMENTS ON TRADE BETWEEN "
Page 58 and 59: Now suppose that the government of
Page 60 and 61: This is only possible politically b
Page 62: PART 11 COMMENTS ON TRADE BETWEEN "
Page 65 and 66: NOT A ZERO-SUM GAME tially the case
Page 67 and 68: NOT A ZERO-SUM GAME While far from
Page 69 and 70: NOT A ZERO-SUM GAME injurious U.S.
Page 71 and 72: NOT A ZERO-SUM GAME Free trade mean
Page 73 and 74: NOT A ZERO-SUM GAME pally steel and
Page 75 and 76: NOT A ZERO-SUM GAME As the delinque
Page 78: Selected Bibliography Basti-at, Frk

Not a Zero-Sum Game - Ludwig von Mises Institute

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