Domestic Buying

• The Domestic Household Sector: The household sector of this thriving metropolitan area has a significant number of imports from the foreign sector. One place to begin is with a few of the goods purchased by Pollyanna Pumpernickel. Returning from her weekly shopping trip to the MegaMart Food Emporium Super Center, Pollyanna has bananas and coffee imported from South America, chocolate imported from Germany, and cheese imported from Switzerland. Another example of importing is Dan Dreiling, the drywall guy, who recently purchased a new car imported from Japan. Edgar Millbottom, Shady Valley's resident popular music expert, regularly buys CDs imported from Europe, especially the popular Belgium group, Live Headless Squirrels. Winston Smythe Kennsington III is fond of flying to France to partake in a fabulous French meal. His foreign consumption is also an import.


• The Domestic Business Sector: The Shady Valley business sector purchases a significant amount of capital goods from other nations. The Wacky Willy Company uses sewing machines imported from Canada to fabricate their popular line of Stuff Amigos. Waldo's TexMex Taco World makes use of taco steamers imported from Mexico when they prepare Super Deluxe TexMex Gargantuan Tacos. And the 4M cable television company uses coaxial cable imported from Finland to carry their cable television signals.


• The Domestic Government Sector: The government sector is not above purchasing a few goods and services imported from other nations. The state-supported university, the Ambling Institute of Technology, has several foreign citizens on its faculty. The Shady Valley city government buys paper parchment imported from China to record for posterity all of its important laws and regulations. And more than a few components that are combined into the assembly of the aircraft housed on the Major General Air Force Base, located southwest of the city, are imported from France, Germany, England, and Russia.

A World of Trade

To see how imports fit into the world of global trade, consider a few notions:

• Foreign Trade: Foreign trade is the exchange of goods and services that takes place among countries. One country buys. Another country sells. Foreign trade is essentially a market transaction in which the buyers reside in one nation and the sellers reside in another. Imports view this trading process from the perspective of the buying country.


• Exports: Exports are goods and services produced by the domestic economy and purchased by the foreign sector. In other words, exports are goods sold to other countries. Exports view the trading process from the perspective of the selling country.


• Net Exports: Net exports are the difference between exports and imports, that is, exports minus imports. This is the "balance of trade" between exports and imports. If exports are greater than imports, then net exports are positive. If exports are less than imports, then net exports are negative. Net exports provide a handy way of indicating the overall interaction between the domestic economy and the foreign sector.

A Circular Flow Leakage

The Circular Flow

A basic representation of the circular flow is displayed to the right. The components of this model are the four macroeconomic sectors--household, business, government and foreign--and the three macroeconomic markets--product, resource, and financial.

Imports are the payment flow from the three domestic sectors--household, business, government--to the foreign sector in exchange for the physical flow of goods and services from the foreign sector to these three domestic sectors. The key implication from the circular flow analysis is that an increase in imports REDUCES the total volume contained in the domestic flow. That is, imports are considered a leakage out of the circular flow.

This reduced volume has two important, interrelated implications:

• First, it means that the gross domestic product received by the domestic business sector, factor payments to domestically-owned resources, national income earned by domestic citizens, and consumption undertaken by the domestic household sector are all less.


• Second, it means that there is less income that can be diverted to domestic saving to the financial markets for use by the domestic business sector for capital investment and taxes to the domestic government sector for government purchases.

The Good and The Bad

On the good side, imports provide domestic buyers (primarily consumers) with a greater choice of goods. Consumers are more likely to find the specific good that provides the greatest satisfaction. In addition, competition among producers generally improves efficiency and leads to lower prices.

Suppose, for example, that no imported automobiles are sold in Shady Valley. Buyers can choose only from the cars produced by three domestic companies. In this case, choices are limited and each of the three domestic companies has a great deal of market control. Buyers buy from one of the three or not at all.

However, if automobile imports from seven foreign companies become available, then the Shady Valley car buyers now have a great deal more choice. They are more likely to find the specific make and model suiting their personal preferences. Moreover, each of the ten companies has less market control.

Summing up the good and the bad:

• The Bad: Imports are bad for the overall volume of the circular flow. They are also bad for domestic companies (and their resource owners) who face greater competition. These companies likely produce less output and their resource owners receive less income.


• The Good: Imports are good for domestic consumers. They have more choices among the goods purchased and pay lower prices. They generally receive a greater overall level of satisfaction.