My country has major economical headaches each 10 years or so, like hyperinflation or defaults or things like that. It's been 17 years since the last major crisis (a larger crisis than the 1930's crisis) but it looks like we are aiming again towards the same. Usually we have trade imbalances or fiscal deficits which causes my country being unable to sustain the current money exchange rate, the goverment devaluates the currency and that leads people to increase the price of the goods in the same rate "just in case other prices increase the same rate", that usually is the cause of a snowball inflation. I was taking a look at our current imports. Usually I can't get a detailed list but we have a trade imbalance deficit record of 8,47 billions last year (2017) and the car imports increased in 2 billions in one year, being 6,3 billion total the amount of imported cars. My question is, being the trade imbalance a major cause in the inflation we have, why we just can't stop importing cars, at least in the proportion it creates imbalances? Why we can't live with new cars or imported (non national) cars? Could there be any serious consequences to this or we are just paying the consequences of some people wanting to live with goods/cars which signals their high social status?


1 Answer 1


1- Some basic macroeconomic fundamentals

I highly doubt a trade imbalance is causing high inflation. The trade deficit is likely happening because of economists call "Twin Deficits". I'll spare you the accounting that leads to this equation and present you a setorial balances identity. Let $S$ be private savings, $I$ be capital formation, $G$ be government spending, $T$ be government revenue (in taxes), $X$ be exports and $M$, imports. We have:

$$(S-I) + (T-G) = (X-M)$$

In intuitive terms, the private sector balance plus the public sector balance, which is basically the domestic balance, must equal the trade balance. This happens due to sheer accounting, it's not a "theory". This is the same in the US, Venezuela, China and in a tribe of herdsman.

When $(T-G)$ is negative, we have a budget deficit - your country's case. Assuming people are saving the same amount, investment must fall or imports must go up. The more realistic scenario is that both things happen.

And we also have the Long-Run Fiscal Equilibrium condition. Let $M^s$ be money supply, $B$ be government debt, $P$ the price level, $r$ be the real interest rate and $t$ be time, we have:

$$ \frac{M^s + B}{P} = \sum_{t=0}^{\infty} \frac{(T_t - G_t)}{(1+r)^t}$$

This basically means that real government passive must equal the liquid present value of expected government savings. If people expect the government to continue to have budget deficits, either interest rates or the price level must go up. That's what's causing inflation. This also means that if the government increases the money supply without credibly signalling it will save more in the future, it will also implicate an increase in the price level, inflation.

2- Some basic microeconomic fundamentals

If importing cars gets prohibited, the supply of cars will go down. The supply curve shifts to the left. This means less cars available and more expensive ones.

Higher car prices signal domestic producers to make more cars. Supply goes up again and prices tend to converge to a new equilibrium. The problem is making cars domesctically might no be very efficient. Your country employs more capital and labor in other activities because it is more productive to do so. If it weren't and there was an easy opportunity to make money by producing cars, people would just do it.

Restricting imports is basically making your country poorer by forcing it to have less goods and services available and allocating precious capital and labor to activities that aren't as productive. It's a very bad idea.

  • $\begingroup$ I'm not sure if I understand correctly what you mean by "your country employs more capital and labor in other activities because it is more productive to do so". How about if they dont do that, because they dont have a larger market to sell them. If people can't buy imported cars, wouldnt they have to buy national made cars, or repair the ones they already have instead of changing them each year. $\endgroup$
    – Pablo
    Commented May 4, 2018 at 23:47
  • 1
    $\begingroup$ They say there is high inflation because there is too much national money in relation with dollars. Dollars leave the country for buying exported goods. Which are necessary when they are goods for creating other goods or when it's technology needed for medicine or things like that. But buying luxury goods doesnt seem very necessary. They also create money to sustain local deficits $\endgroup$
    – Pablo
    Commented May 4, 2018 at 23:50
  • $\begingroup$ A consequence I didnt have in mind when I wrote the question is, if you ban cars from x country, that country could ban the products you export to them. But with some countries (which are the ones who sells cars to us mainly) we have trade inbalances. So by going in a ban to ban we would lose less money than the one we lose now, I suppose. $\endgroup$
    – Pablo
    Commented May 4, 2018 at 23:52
  • $\begingroup$ BTW, my country main's exports are farm products. They also sell cars to Brazil (not many) and to the local market. People who works in the country (labor force and capital) wont stop doing it to star making cars, so you wont have a reassigment of labor force to an unefficient activity there I suppose. There is also unemployed people who can work in the country (and some making cars I suppose, but not in activities of making cars which requires much qualification). And many people uses the capital for financial speculation. Placing that money in productive activities wouldnt hurt I suppose?) $\endgroup$
    – Pablo
    Commented May 5, 2018 at 0:13

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