Sep 13 2008
A Wealth Transfer When A Country Buys Imported Oil? No Way!
Published by Steve Latter at 6:38 am under
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WikipediaMore misleading economic statements from uninformed people who have never taken an economics course!
What about, you say?
I’m glad you asked!
It seems like I continuously read and hear in the American press that the United States is creating a giant wealth transfer by buying oil from other countries. Those “wealth transfer” words imply to the typical citizen that somehow our U.S. money supply is leaving our country, never to return again, and somehow our country is then poorer after the transaction and the country we imported from is now richer!
That is only a half-truth! Yes, the other country becomes richer, but we grow richer also by an equal amount! Both countries always gain economically from trade!
Let’s first get a few things straight before I elaborate: I am not happy either as gas prices rise ($3.50 a gallon in the U.S. as of this writing, although down from over $4.00 recently). I am also not happy that a fairly large share of oil purchases are from countries like Saudi Arabia and Venezuela whose loyalty to our country is certainly questionable. Luckily, the U.S. produces 40% of its own oil consumed and the other 60% consumed is imported from many different countries with 85% of our imports coming from 15 countries with Canada and Mexico being the largest two.
However, when we buy from any of these countries, both countries benefit equally and there is NO transfer of wealth. When the U.S. buys oil from any other country those U.S. dollars paid on the purchase are immediately returned to the United States and are spent almost immediately in our country since the other country cannot use our dollars in their country. What is really happening is that both countries’ citizens GAIN (not lose!) equally as we are, in essence, trading one product for another for both countries to enjoy!
Let’s use an example. Let’s say the U.S. buys 1000 barrels of oil from Saudi Arabia. At today’s price per barrel of $100 that would mean the U.S. would pay Saudi Arabia $100,000 and Saudi Arabia would then, in turn, be forced to turn around and use the paper ($100,00 USD!) on say, a bunch of iPods from Apple. Yes, the Saudi’s are listening to “I Kissed a Girl” by Katy Perry with their IPods under those smart head robes they wear! Ladies and gentlemen: that is why they call it trade: the essence of the transaction is that we have traded some of our iPods for some oil to fuel our cars and heat our homes. Both of us have gained! Katy Perry is hot on the charts and the Saudi’s “got their hands in the air”, and we can now drive to 7-Eleven for a Big Gulp and stay warm in the winter.
Also, think of it this way: when an American buys a gallon of gas the money is, in substance, going to an American business such as Apple! All spending of US dollars is spent back into our economy, and all spending of Saudi dollars (actually they call their currency the “dollar” also but it doesn’t look like ours!) benefit the Saudi economy.
Yes, trade is mutually beneficial. I would rather a warm home this winter and forego another Katy Perry song!
About the author: Mr. Latter teaches various business courses at Paul VI Catholic High School in Fairfax, Virginia (USA) including AP Economics,
Accounting, Marketing, and Personal Finance.
Mr. Latter is a Certified Public Accountant (CPA) and former Chief Financial Officer with 8 years of high school business teaching experience. Prior to his career change to teaching in 2000, Mr. Latter spent 21 years in various auditing, accounting, and financial positions with Price Waterhouse, Sprint, and Teleglobe. 
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I was wondering why so many people seem misinformed that trading hurts our economy and that our nation is losing wealth? If trading benefits our country why do so many people feel that trade hurts us?
Hi Drew,
I believe that the simple answer to your question is that citizens a) generally have not taken an economics course, and b) they focus on the loss of jobs by the businesses in their country that lose out to better competition.
The gains from trade are the positive net of two occurrences: the plus is more product choices, lower prices, and better quality for the “winners” which is the country’s citizens as a whole. But this gain is partially (&temporarily) offset by the “losers” which are the country’s businesses thaqt have to lay off workers (or close) that lose out to the better foreign competition. It is much more VISIBLE to see the 100 people laid off in Michigan than the lower auto prices spread out to millions of Americans.
Also, the great thing about trade is that the “losers” (displaced workers) get back in line and find other jobs which is evidenced by a very consistent employment/unemployment rate over the years that trade has been increasing. Its painful for the workers that are displaced but the alternative of forcing citizens to not enjoy trade would slow economic growth.
Thanks for participating!
okay, so the US’s exportation (trade) of oil to Japan from Alaska benefits the US because in return we purchase beneficial Japanesse products. Wouldn’t it be of a better interest to the United States economy if the money gained was converted and spent to bolster the crumbling internal economy? Can one then invest the money gained in an oil transaction, or can it only be spent in the country who purchased the oil?
hey Sabrina, of course it would do the US economy good to convert money into the internal economy. However, that would not put an end to the problem. International trade is important, was important and always will be, especially with the Asian and European market. For instance the US can greatly strengthen its economy with products coming from Japan. You would probably make less, or no profit, in all you wouldn’t gain much, if you invest the money only in the internal economy. So I guess that answers your second question as well. Yes you can invest that money and you can also spend it in the country, who purchased the oil, for example you can buy cars from the Japanes Car Industry.
Was I any help and are your questions now answerde?
Hi Sabrina,
If Japan buys oil from the United States, the US must use the Japanese Yen received to buy Japanese products.
In effect, and using my analogy in my posting, we would have a trade of oil (Japan gets) for Hondas (US gets).
I’m not sure the U.S. economy is crumbling…at least yet…. but a trade of oil for Hondas helps both the US and Japan ’cause both economies now have more goods and services than if they did not trade.
In fact, in our slowing U.S. economy it is trade that has been the “shining light” as trade has been at an all time high causing the U.S. economy to not be as bad off.
Thanks for the question!
Mr. Latter,
First of all, we actually quickly talked about this the other day in my micro class. The phrase that the book and the teacher used was “imports are paid for by exports.” I just thought it was interesting that my teacher was just talking to us about this. And, the PPC has already come up, I still remember that from last year.
Anyways, I was wondering if some of the cause for concern was the fact that these countries are using our money to buy US companies. I just wonder if we are culturally ready to have our companies owned by people outside of our country. Is this a cultural deficiency? Should we be happy about this? I believe I remember reading that most of the Chrysler building is now owned by a Saudi firm. I think it’s a little odd having an American landmark under country of another country.
Hi Patrick!
Great to hear from you!
Yes, “imports are paid for by exports” is just another way of saying that each country cannot use the other country’s currency so it must be spent back into the home economy. As I like to say, anytime you buy a Honda (Japan) that same money is going to be spent almost immediately right back to America. Think of it this way: the money you spend on a Honda will help some other American company dollar-for-dollar.
AAhhh….Patrick, you got to another level of complexity because you have now studied economics for two years: Japan may spend the US dollars we paid them for the Hondas by building a business in Alabama ( a gambling casino or car plant, for example). As an alternative, Japan may lend the US dollars back to the US Government by buying a US Bond. As another alternative they may elect to buy one of our buildings as rental property.
In all of the above cases, which is taught in Macroeconomics under “Balance of Payments”, the US dollars received by Japan for the Hondas is spent back immediately into the US and it helps our US economy in some way. If Japan builds the casino or car company on US soil that creates jobs and incomes in the US. If Japan lends it to the US Government (should the US need to borrow because of deficit spending) the Japanese are really temporarily “saving” the US dollars and they will eventually be paid back with interest and then buy something only in the USA. Also, until Japan does liquidate their US savings (sell their bonds), Japan has allowed our US Government to spend the dollars, provided by Japan.
Your last question is the toughest one. Is there a cultural problem with other countries buying real estate and building companies in our country. Well, I can’t speak for everyone on that one. I don’t mind at all! I am grateful for all the investment that countries like Japan, China, Germany, Canada, and Britain have done in our country with the US dollars we have sent them. They have created millions of jobs through their spending of dollars back into our country. In fact, many people believe they are buying from an American country, but they are not. For example, Burger King, Budweiser, and Giant Food are all foreign owned companies doing business in the United States as they have elected to take our US dollars paid for imports to establish businesses in the United States.
Thanks for the post!
I found this blog quite interesting-especially since prior to taking AP Macroeconomics, I was one of those typical citizens who heard ‘transfer of wealth’ and automatically thought American money was being lost to other nations. The press seems so focused on covering stories of buying oil from the Middle East and making it appear as though the United States is not benefitting at all. However, now I am thinking back to one of our very first Macroeconomics classes when we discussed clothing, China, and Wal-Mart. I learned that because the American company, Wal-Mart, purchased clothing from China; the Chinese must, in return, use the money we paid them with on American products. Therefore, in international trade, all of the countries involved benefit from the transaction.
There are other means by which international trade helps the economy as well. Trade also increases global competition. Because companies and consumers are acting out of their own self-interest, they should buy the best product at the cheapest price. This, in turn, causes local and global producers to fulfill these wants. International trade generally contributes to our overall well-being. This importance of international economic realtions is quite visible in the current issues with the American stock market. As our stock market has been falling, economies throughout the world have suffered too. This further proves the point that as one country succeeds, so do the others-and as one country suffers, the others do as well. We must not be blinded by the constant usage of the phrase ‘transfer of wealth’, as our wealth is not being transfered, but returned to us in other markets.
Question: question 12 in “Thinking Physics” – page 259
Inside a warm damp cave completely sealed off from the outside world could life flourish indefinitely?
Answer: No life forms could flourish indefinitely. In an isolated system, Entropy always increases. Life tries to push Entropy in the opposite direction. When life is created, entropy decreases in the cave but nature demands a greater Entropy increase offset. The cave, being sealed, would mean that Entropy would reach its max, thus energy necessary to sustain and generate new life would be unavailable. Maybe we should learn a lesson from this. Available energy is mandatory. Wealth may equate to available energy. If you want to live in a nation that is prospering make sure that its available energy supply is abundant.
Entropy is one of “Physics Foibles”. Look it up. Solve energy to mitigate all other issues.