[MUSIC] Welcome to The Power of Macroeconomics. Lecture Ten, Exchange Rates, the Balance of Payments, and Trade Deficits. The purpose of this lesson is to explain how exchange rates and our international monetary system work. And illustrate how fiscal and monetary policies may or may not be used in a global economy. We will also examine the roots and scope of America's chronic trade deficit problem. >> Mirror, mirror on the wall, who's the biggest debtor nation of them all? The surprising answer is not Brazil or Mexico or some other developing country, rather it is the richest nation in the world, the United States of America. In this regard the US has come full circle. For when America was in its infancy it was likewise a debtor nation. In fact, from the beginning of the revolutionary way until well after the Civil War, America borrowed heavily from the nations of Europe to build its capital stock and infrastructure. It wasn't until the US helped Europe fight two world wars that the debtor shoe was put on the other foot. During those years the US greatly expanded its exports to Europe and after each war it lent large sums of money to the combatants for post-war relief. In the course of doing so the US became the world's largest creditor nation. Beginning in the early 1980's, America began running huge trade deficits. And over the years, these trade deficits have led to an accumulated net foreign debt, in the trillions and trillions of dollars. To many observers, America's chronic trade deficits are every bit as dangerous as its chronic budget deficits. These trade deficit hawks warn that America is being forced to sell off its land and its factories and its future, to finance these deficits. Others however see the trade deficits simply as an opportunity to buy inexpensive foreign goods, and enjoy a higher standard of living than Americans could otherwise achieve. These trade deficit doves argue that if foreign countries are foolish enough to sell us cheap goods, we should be wise enough to buy and enjoy them and not try to erect protectionist trade barriers. In this lesson we're going to examine the roots and scope of the trade deficit problem from the financial side of the ledger. To do so we must first learn some basic balance of payments accounting. Then we'll describe how exchange rates work and how the international monetary system is structured. Once we get these fundamentals down we can then talk about the important impacts the domestic fiscal and monetary policies can have on foreign capital markets and the trade deficit. From this discussion we'll also come to better understand the important link between the budget and trade deficits and why it is increasingly important for the nations of the world to coordinate their fiscal and monetary policies in a global economy.
