Make Trade, Not War | Cash Course | PragerU

No nation on Earth has everything it needs, whether it's energy, raw materials, or finished goods. Some might have lots of oil, but not a lot of land to produce cattle. Others might have lots of bananas, but not a lot of lumber. So how does a nation get access to all the various goods and services that it needs? Well, throughout history, one way was... War! But war is costly. Another option is to trade for it. Trade? Yes, trade! Trading can lead to a higher quality of life and standard of living for both nations involved, which isn't the case when it comes to war. How? Well, a couple of reasons. Go on. For one, trade boosts productivity through specialization, which allows countries to focus on producing one thing efficiently, while trading for other goods they need. For example, the U.S. might specialize in corn. Colombia, bananas. Without trade, both countries would need to produce everything themselves, like fuel and food, making specialization difficult since resources would be spent producing those basic goods. Trade also allows us to benefit from comparative advantage. This is when a country can produce a good or service at a lower opportunity cost than another country. For example, Colombia, with its tropical climate, produces significantly more bananas than the United States, even though it's much smaller. This is because Colombia has a comparative advantage, costing them less time, money, and resources to grow bananas than the U.S. The U.S. could produce bananas, but trading for them is more efficient for the U.S. than producing them themselves. Okay, amigos, here you go. One carton of bananas, that'll be 35,000 pesos. Pesos? We only got dollars. No can do, amigo. Pesos only. What? You guys need to do a currency exchange. Currency exchange? Yes. Not all nations use the same currency, so when you trade, you need to consider the foreign exchange rate. This is the relative value between different currencies and how much is needed to exchange one currency for another. For example, one U.S. dollar for about 4,400 Colombian pesos. Like prices, exchange rates will fluctuate based on supply and demand, as well as other economic conditions. A country's rate of inflation, its debt, and its economic policies can all contribute to how much a currency is worth. When one currency increases in value compared to another, we say it has strengthened or appreciated. This typically happens when a nation's economy is doing well, since there is more demand for their currency. But when a currency decreases in value compared to another, we say it has weakened or depreciated. This typically happens when a nation's economy isn't doing so well, since there is less demand for their currency. The peso is weak. We can buy a lot of bananas. Who are you calling weak? Wait, wait, wait. Weak doesn't necessarily mean bad, and strong doesn't necessarily mean good. Like anything else, there are trade-offs to having a weak or strong currency. A weak currency can mean relatively cheaper prices for a country's goods or a lower exchange rate for foreign tourists and foreign buyers. However, this could lead to more expensive imports from countries with strong currencies. On the other hand, a strong currency may mean relatively cheaper imports but fewer tourists and foreign buyers of a country's goods. It's also important to remember that weak and strong are relative to each country. What may be considered weak for the U.S. could still be very strong for a developing nation. The relationship between a nation's imports and exports, known as the trade balance, is closely tied to its exchange rate. When a country exports more than it imports, which is a trade surplus, demand for its goods and services is relatively high. This also means there's a high demand for the nation's currency, which will cause it to appreciate. In 2023, countries like China, Germany, and Russia had significant trade surpluses. On the other hand, when a country imports more than it exports, which is a trade deficit, demand for its goods and services is relatively low. This also means there's a low demand for the nation's currency, which will cause it to depreciate. In 2023, countries with significant trade deficits included the U.S., United Kingdom, and India. In a dynamic global market, exchange rate fluctuations can influence the trade balance, just as the trade balance can drive changes in exchange rates. Like strong or weak currencies, a trade surplus or deficit isn't necessarily good or bad, but rather reflects how much a nation depends on imports or exports for its economy. Okay, okay, I'll give you a deal. Today, trade is a global affair, connecting people and nations with each other for goods and services, from chopsticks to jumbo jets. Whether one country trades with another, though, is affected by political, geographical, and cultural factors, and not just simply dollars and cents. But understanding how trade and exchange rates work can help you become a more savvy investor, consumer, and even possibly negotiator. Now can I interest you in some football jerseys? You mean soccer? Watch more at PragerUKids.com And parents, don't forget to subscribe.