I interested in the net effect of buying locally versus abroad.

The UK Government wants to buy a ship. It can buy from a UK or Korean shipyard. The unit price is the same for both yards: £10. A ten pound note. Nice and simple for the purpose of this example.

If the purchase is from the local shipyard, then the ten-pound note is delivered to the local yard directly from the bank account of the Government, having previously been forcibly removed from other UK citizens via taxation. This wealth is then distributed throughout the UK economy, via the employees and suppliers of the shipyard.

Some people advocate buying locally for this reason: they view this local economic stimulus as a positive side-effect of buying locally.

If the ship is purchased from Korea, assuming perfectly efficient currency exchange, then the wealth is transferred (having been converted into the Korean currency by a foreign exchange brokerage) to a Korean company. This wealth is then distributed around the Korean economy in a similar way, and presumably the Korean economy sees the economic stimulus.

But the original ten pound note has not vanished. It is now sitting in the bank account of someone behind the foreign exchange brokerage. This ten pound note will either be saved, or converted into another currency, or spent in the UK, because the UK is the only location where it is legal tender. So the money is STILL (eventually) spent in the UK, but a little more circuitously.

Is my understanding correct?

Does this mean buying locally is in some sense equivalent to buying from another economy? Or where have I gone wrong?

Does the situation change if Korea has the same currency as the UK?

up vote 1 down vote accepted

Does this mean buying locally is in some sense equivalent to buying from another economy?

It depends on how bilateraly opened are the economies of the countries that are in trade interactions. To get an idea of which country ultimately benefits the most from those trade interactions, the sign of the Uk-to-SKorea-trade-balance is likely to be a good proxy. A positive sign would mean that wealth redistribution due to these trade interactions are greater locally than abroad. But still, remembering that wealth concretly consists of incomes stemming from labor and dividends, its redistribution is strongly related to having (or not) world-wide shareholders and local workers (that are also consumers) that mainly (in value) buy goods locally. And if what they buy locally is actually also mainly produced locally, i.e. the Uk-to-World-trade-balance is positive, we can reasonably think that wealth redistribution mainly occurs at the domestic level.

Why is the consideration of trade deficits/surpluses relevant?

Trade deficits/surpluses are good proxies of how netportable (somehow exportable $-$ importable) the aggregated purchasing powers of coutries in trade interactions are. Indeed, the idea is that the difference between buying locally versus abroad vanishes if owning/accessing foreign markets is as easy as owning/accessing local markets -- except for workers who would be shareholders of nothing, which is rather unlikely: we all have a savings account(?) Not that obvious.

In the scenario in my question the ten pound note ends up sitting in the account of someone backing the foreign exchange broker.

The ten pount note is an asset that has its own value in South Korea's currency. If you assume that currency exchange markets are perfectly efficient, there is not point in considering transitory states and only the final usage matters. Thus, the definition you make of final (and transitory) is of first importance and is contextual to a specific question, with an explicitly formalized time horizon. Moreover, when sitting in the account of someone backing the broker, the ten pound note can be used to create money if, say, it is short-sold or lended.

Can we agree that the ten pound note will be either at rest in a repository (bank account/under a bed) […]

Incidentally, even the fact of having it really at rest in a repository is very unlikely to be neutral : this will have impact on the solvency of the depositor. With a higher solvency she can benefit from lower interest rates and/or from better leverage effects.

Can we agree that the ten pound note will […] be spent in the UK economy (as that is the only accepting economy)?

The point is that this ten pound note may stay "unused" for long periods of time and simply be considered as a traditional asset, sold here and there. The amounts that would be collected during sales could be used all around the world. However, is this an observed behavior ? I.e Is British pount used as a safe haven value? If the answer is No, then indeed a UK note is very likely to be spent locally as that is the only accepting economy.

At best I see a difference in the speed of money with respect to spending locally vs abroad. […] So the only real difference between local and abroad is efficiency of spending (fees, speed of money).

IMO, this summarizes well the idea $+$ how bilateraly opened are the economies of the countries that are in trade interactions. On the other hand, and strictly speaking about the 10 pound note as such, this additionally complexifies our story by outlining that if this speed is "low" and relative-to-dollar inflation "high", the note of 10£@year0 may worth ~0.00£ in year0-based real terms many years later.

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    @Ben. When you say, "as that is the only accepting economy", this note may stay "unused" forever and simply be considered as an asset, sold here and there for long periods of time. Amount collected during sales can be used all around the world. Actually, it looks like intelectual gymnastics cannot answer to this question, only reality based on observed behaviors. Is British pount used as a safe haven value? The answer you are looking for may be related to that one. If the answer is No, then indeed a UK note is very likely to be spent locally as that is the only accepting economy. – Kanak Oct 10 at 8:58
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    @Ben. Agree. Also "the speed of money wrt spending locally vs abroad" summarizes well the idea. On the other hand, and stricly speaking about the note as such, this additionally complexifies our story by outlining that if this speed is "low" and relative-to-dollar inflation "high", the note of 10£[year0] may worth ~0.00£ in year0-based real terms many years later. – Kanak Oct 10 at 11:05
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    These comments enlighten, and I would accept a summary as an answer. In your answer you mention trade deficits/surpluses - why are these relevant? – Ben Oct 10 at 11:08
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    @Ben. I will do this summary before the end of the UTC-day. I mention trade surplus because they are good proxies of how netportable (somehow exportable $-$ importable) the aggregated purchasing powers of coutries in commercial interaction are. – Kanak Oct 10 at 13:17
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    @Ben done. Difficult to summarize such a complex system. – Kanak Oct 10 at 22:34

The currency is not as relevant as so many other more important factors.

Buying a better ship is a very important factor. If a better ship is chosen and it is Korean, then the buyer (and seller) will benefit from their comparative advantages. I.e. instead of making British workers produce inferior ship, they can produce something they are better at instead, sell that to Koreans, and buy a better ship from them.

Another factor is the fairness of trade. Is the trade fair? Are there any tariffs, subsidies, dumping, theft, currency manipulation, corruption, extortion, forced labor, etc. etc. going on? Maybe not in South Korea and UK, but generally international trade is never perfect.

National security. Are you buying a military ship? A tanker? Is the deal big enough to be abused for political purposes?

There are many more of course.

Currency element is just that one item the list that I highlighted.

That's why big deals like ships, which are more like into 10 billion pounds, usually require a lengthy public review process to go over all of these issues.

On the other hand, if we are talking about 10 pound soda bottles, then currency is about irrelevant for large to medium businesses that can fix exchange rates using Forex futures or swap contracts at virtually no cost. Different currencies is a problem for smaller businesses because accessing heavily regulated financial markets is pretty tough for them and they usually have to bear exchange rate risks and pay hefty commissions to the local banks.

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    This does not seem to answer the question, which is about whether spending a country's currency in a foreign country eventually provides fiscal stimulus in the country of origin. – denesp Oct 5 at 5:04
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    @denesp for that part, there are also too many factors. Capital flows not related to trade; time; whether the currency is used to trade with other countries, like USD; governments reserving foreign currency; citizens saving foreign currency; foreign currency circulating along or instead of local currency, and so on. One must study balance of payments to answer this part of question, it is different for every country, and some parts of it may not be public or available. Even statistics on the US balance of payments has huge error margins – Arthur Tarasov Oct 5 at 5:26
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    Yes, but why not write about these in your answer? This is pretty much what the question is, not just in part. – denesp Oct 5 at 5:40
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    @denesp You are probably right, I just got an idea the question was more about buying local or abroad in general and currency was just one argument the author used, specifically its circulation cycles, which has hardly any effect with a competent central bank that can adjust the money supply with interest rates and reserve ratios to always set the optimal amount of stimulus that inflation allows. – Arthur Tarasov Oct 5 at 5:58

If Britain is buying a ship from Korea, it needs to pay for that ship. If it has to pay for the ship, then it needs to sell other goods abroad, or it won't be able to pay.

So the issue of buying locally is more complicated, and it cannot be properly addressed unless we take into account the national strategy of Britain. It is not merely a problem that if Britain buys abroad, it will be "exporting jobs", as it is often expressed. The actual question is, "what is the importance of ships in British economic strategy?"

If Britain thinks that ships are of central importance - they are a commercial nation, with a maritime vocation, and need strong fleets to make their trades abroad - then they probably should have a dynamic ship industry, lest they be placed in a complicated position if international events lead to them being unable to import ships (suppose that they go to war with Korea, of that Korea decides to no more sell ships to them).

If on the other hand they think ships are unimportant (for instance, the important thing is the computer system that is used to drive the ship), then they probably should buy ships from Korea, or Greece, or whomever offers the best price/quality relation.

On the other hand, your reasoning is only valid if the ships bought have a positive role in the British economy. Suppose Britain was like some oil exporting countries, where the local elites strategy is merely to buy as much foreign gadgets as possible for the enjoyment of the rich. Buying yachts for the super-rich to entertain themselves won't have the same economic effects as buying cargo ships that will boost your foreign commerce.

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