Trade Flows:  California, Texas, and Washington

#1.  The diagram below illustrates trade among 3 states.  The current account (flow of goods and services merchandise) is indicated by the solid arrows.  Draw in the capital account (flow of money and/or financial assets) using dotted arrows.  (One has been completed for you.)           Balance of Payments:  State Trade

#2.  Complete the Balance of Payments Accounting for each of the 3 states.  Categorize flows of goods or money out of a state as exports. Categorize a flow of goods or money into a state as imports. Record all the transactions depicted in your trade diagram.  (The oil transaction has been entered for you.)  Then, calculate the totals.  (Hint:  Don’t forget the ? and + signs when you subtract imports from exports.)

#3 – What do you notice about the sum of the current account total and capital account total for each state?  Do you think this is always the case?  Why?

The sum is 0 because any purchases made are paid for by money going out of the state and sales made bring money into the state.

#4 – A deficit exists if a state imports more than it exports.  A surplus occurs if a state exports more than it imports.  Decide whether each state has a deficit or surplus in each of its trading accounts:

	Current Account (Goods and Services)		Money Account
	Deficit	Surplus	Deficit	Surplus
Washington	Yes			Yes
California	No	No	No	No
Texas		Yes	Yes

#5 – In plain words, what does it mean to have a current account deficit?  A current account surplus?  Is one better than the other?  Explain.

A current account deficit means that people in the state have changed their wealth from the form of money to the form of goods and services.  They’ve sent their money out of the state to pay for those purchases. A current account surplus means that people in the state are holding onto their wealth in the form of money rather than buying goods and services.  They are getting the money by exporting, selling the things they make to consumers in other states. No, there is no objective way to determine whether a deficit or surplus is better.  It depends on what the people in the state want – the merchandise or the money.

#6 – Was trade “balanced” between each pair of states? – no.  Can you tell which state came out the best (gained the most) in this example? Explain.

Trade between California and Washington was balanced if we mean that each sent the other the same dollar value of goods. For the other pairs of states, there was an imbalance in terms of merchandise and/or money exchanged. No, it’s not possible to tell which state came out better.  Since the trade was voluntary, we’d have to assume that the traders in all 3 states were happy.

#7 – Total the value of ALL the goods exchanged in this example:  $45,000 #8 – Total ALL the money spent in this example:                              $45,000 #9 – Was trade “balanced” among all 3 states? – yes

#10 – What would happen to the analysis of the trades if we were looking at the countries of Japan, Saudi Arabia and the United States?  Would the total flows of goods and money into a country always balance the total flows of goods and money out of the country? –          yes