Economics of Spending Money Abroad

With the state of the economy, it saddens me to see people spend their disposable income in other countries. (i.e.: vacation). That money is definitely theirs to do with as they please, and it is not my place to tell anyone how to spend their money, but I can’t help but think of the effects it has on the US economy.

My hope is that a majority of the money goes through travel agencies, and it finds it’s way back to the US rather quickly. But what about the money that stays in other countries’ economies?

Does the reduction of paper money in the US benefit the value of the dollar by combating the effects of inflation? And in relatively small quantities, would that outweigh or offset the benefits of the money being taxed in the US through sales tax and benefitting local economies?

I guess it boils down to this: Does the US economy derive any benefit from its citizens vacationing/traveling abroad?

Of course! But any benefit is a low bar.

The tourist might fly on an American built Boeing jet bought by an American airline. Then get picked up by a taxi driver driving American built car. Then be whisked away to a hotel with a familiar American chain affiliation.

Many of the islands of the Caribbean are heavily dependent on imported goods for basic supplies of daily life. And much of that comes directly from a certain nearby large trading partner… the US.

So if that tourist wants to eat, he is putting money into a local economy that bought the food on his plate from the US. If he wants to drive a rental car, the fuel very well may have been refined in the US and the car be American built. If he wants to pay with his credit card his American bank takes a cut of every transaction.

And so on…

There are many foreigners who spend tourist dollars in U.S.A., as well. I don’t know the figures, but wouldn’t be surprised if U.S. gets a net benefit from tourism – or did before increased visa hurdles post-911.

If you’re worried about payments imbalance, there are bigger targets than tourism, e.g. clothing and textiles where U.S. runs a $85 billion deficit.

Let me reiterate, for the umpteenth time, that ignoring “paper money” (and associated 2nd-order effects) is, more often than that, the best path to economic clarity. Money spent is money earned by someone else. Paying a New York bartender will benefit New York more than paying a bartender in Timbuctoo.

If you think of a citizen’s foreign vacation as a desirable end “goal”, it means the citizen’s motivation and work output (saving $$$) during the years before that vacation benefits the US economy.

In other words, if you passed a law limiting foreign vacation spending, the total net effect could hurt the US economy. So Jane Doe works 5000 hours towards the dream of visiting Paris. Yes, the USA has the Grand Canyon and Mt Rushmore, but Jane doesn’t care about them. Paris is what excites her. Let’s pretend we have a alternate reality where public sentiment were to shame and guilt Jane into thinking that visiting Paris is unpatriotic. In that alternative world, Jane might only work 4000 hours. *That extra economy activity from Jane’s 1000 hours no longer has a reason to exist. * Jane settles for a domestic location and spends money on the Statue of Liberty so New York tourism “won” but the whole country “lost”. The Status of Liberty is is not something that would have motivated her to exert effort for 1000 extra hours.

If you’re worried about money spent overseas, vacationing isn’t the big ticket item by a long shot.

The big ticket items are oil and manufactured goods. Vacations are a drop in the bucket, in comparison.

Ruminator’s argument is on-point. That’s the justification of considering any entertainment as productive. Sure, local entertainment might be a bigger short term benefit, but how can we comparit it with the motivation factors involved in a foreign vacation?

Consider also that at least some foreign travel has huge economic benefits for the U.S., over time, in that it promotes the internationalization and sophistication of Americans. For example, a junior year abroad in France or Spain can result in a worker who better understands French or Spanish language and culture and can more effectively trade with French-speaking or Spanish-speaking countries. Even short vacations can expose us to different cultures and help us understand them.

Of course, some travel, say a Bermuda vacation, produces little or no benefit of this kind. However, with the increasing globalization of the world economy, I think it’s a mistake to focus too much on nationalist interests and to ignore the legitimate needs of foreign countries’ economic players. Why should a New York bartender have an inherently better claim to your business than a Bermuda bartender?

To be a bit of a pedant, when Jane goes to Paris, she very likely isn’t actually spending any American money there: She’s spending Euros she traded from someone who had Euros and wanted dollars. The guy who wanted dollars probably wanted them so he could spend them on American goods and services (or was a bank who dealt with other clients who wanted holdings of US dollars to spend on American goods or services). The price was probably picked so that on the whole the value of money passing in both directions is equal (minus the bank’s cut, which is hopefully small.)

So Jane’s American money probably found its way right back into the American economy in the hands of some European who wanted some American stuff. Jane didn’t burn her American money, she just gave it to someone else to spend.

Of course, big changes in who’s buying what (including vacations) from where is going to have effects on exchange rates, but I don’t think telling everyone to go to Paris, Las Vegas instead of Paris, France (and spend the same amount of money on the vacation, and change nothing else about their lives otherwise) is going to have a net stimulative or depressive effect.

People still use travel agents nowdays?

It doesn’t answer the question, but the point that US citizens spending money abroad is a drop in the bucket in the big scheme of things is a good one. I’d venture to say that US citizens don’t travel abroad as much as people in other countries due to the lack of the “gap year” concept, limited vacations, the weak dollar, the “See American first” philosophy, and the relative geographic isolation. Something like 2/3rd of Americans don’t even have passports, and given the number doubled when they became necessary to travel to Canada and Mexico, and some people like me have had them setting in the filing cabinet unused for 5 years, the number of Americans eating croissants next to the Eiffel Tower is rather small.

I’m more concerned with the number of people buying Toyotas instead of Fords and Chevys. Autoworkers make a good living compared to minimum wage servers and hotel maids.

Just the usual note: That Toyota was probably made in the US. A Ford may have been made in Mexico or Canada. The brand doesn’t have anything to do with country of origin anymore.

Anyway. Citizens spending money overseas is nothing compared to companies, banks, etc. sending money overseas. Petrodollars is a famous example.

I read an article my Milton Friedman in Newsweek years ago about how all those dollars sitting overseas is good for the US. What? He says that they either have to send them back to the US by buying stuff or eat them. Either way is good. And this guy won a Nobel Prize.

Uh, no, they don’t have to send them back. They can lend them to a building in Delhi to put up apartment buildings, and the money spent on that ends up in banks who loan it to people making smartphones in Canton, etc.

Money is a concept. If people think a piece of paper (or some computer bits) are worth something, then they are worth something. Things backed by the US government are perceived as worth something. And having things that are worth something are good for you and not good for people who don’t have those things.

Economic development follows the money. If the money is at location A, then development is more likely to happen at location A. (And taxes get collected on those transactions at location A.)

As to inflation: This is a supply and demand issue. Increasing the number of people who want/have your currency outside your country allows you to increase your money supply without causing inflation at home. Pretty much the definition of a hard currency is one that people everywhere like having in their pocket. Currencies like the Chinese Yuan that are restricted in trading reduces the number of people who want it overseas, which makes life harder for them in tweaking their money supply and adjusting inflation and a bunch of other issues.

So, yes, tourists spending money helps those economies. Not usually big time compared to other things, but for some locales it can make a notable difference.

What people do with foreign dollars is irrelevant to the USA. US dollars in Delhi or Canton are just like gold pieces of 8 or krugeraands or a Van Gogh painting. They are traded back and forth by people who are willing to accept it instead of the local currency. They can lend it to bank in Delhi, who then loans it to Canton, etc. but ultimately, it boils down to this - either the money never returns to the USA, just as if it had been buried - or someone, somewhere, eventually buys something from the USA.

What happens if all the currency starts to go overseas? (or electronic transfers, or whatever?) Then there is less currency here, unless the central bank “prints” more. If the money eventually comes back, then we are balancing trade by selling Fords and Boeings to Canton and Delhi. If it never comes back, money is scarce and we have defaltion… “I’d love to buy that loaf of bread for $5 but I only have $1.”

if you’re bored, look up the Opium Wars. Europe spent all its silver buying tea from China; as silver became scarce, they solved the problem by getting into drug dealing, selling opium from India to China and forcing the imperial government to back off its 19th century War on Drugs.

So maybe the USA can balance it’s payments by selling Coke to the rest of the world.

They kind of do have to send them back, just not directly. A building company in Delhi with a lot of working capital in US dollars is nice, but the workers it employs, and the local suppliers of building materials it uses expect to be paid in Rupees. If the building company wants to use its US dollars for spending in India, it needs to trade them for Rupees first. The only type of company that doesn’t need to make that trade before paying for something is one that is actually purchases things from the US, and it is the needs of those companies that “back” the value of the currency outside the US.

Of course, it’s not entirely as simple as that. There is certainly a secondary market for US dollars based on people who want to retain them for deferred consumption and what have you. China famously “eats” billions of US dollars every year to weaken their currency. Some Latin American countries use the US dollar as a medium of exchange where the local currency has been abandoned or lost credibility, but for first-world economies with stable local currencies, the value of a foreign currency in it is at least roughly tied to the rate at which the currency is desired to buy from its home economy.

the point was made when the arabs were buying up the USA with petrodollars - it bears repeating as the Chinese buy up America with Walmart-Dollars. Who really suffers and who gains when a dollar is spent buying a US asset?

If Sheik Omar al-Richguy buys the Empire State Building for $5B, then a bunch of shareholders of the company get $5B cash. The building does not leave the USA. That $5B might have been better spent building a road or water treatment system in Oman or wherever Omar is. Instead, it builds a dozen mansions, funds a pension plan here, etc.

Maybe the rent from the ESB would have been funding something local, now it goes overseas. …but that just balances the big influx of $5B that came in. Eventually it’s a zero sum game. the loser is the person who buys dollars in China when it’s 6Y to the dollar, then later wants to buy a priceless Ming Vase but has to sell the dollar at 3Yuan to the dollar. The winner is the guy who bought walmart plastic crap at 6Y=$1, and used it, instead of later paying twice as much for the same plastic crap because the Yuan has appreciated.

And that currency fluctuation happens in response to demand; if there are too many dollars, and nobody wants to buy them, they go cheap. You paid 6Y for that dollar, but I don’t see anything from the USA that I need right now, so I’ll only give you 3Y for it. They’re having a sale on real estate, I need to buy some Manhattan property, I need US dollars, I’ll give you 7Y because dollars are hard to find.

It’s the “not directly” that is key. Money needs to move to do any good. As it moves along, economic growth happens at the place where it is moving. The longer a dollar is moving somewhere else, the less good it is here.

Well, sure, but why should someone from Kansas City care whether it goes to Timbuctoo or New York?
(or, so sheer distance doesn’t get involved, why should someone from New Hampshire care whether the money gets spent in New York or Montreal?)

If it is spent in New York, a small percent will help pay for the Interstate. Money spent locally generally produces some taxes. There is no export tax on money. Unless we buy a Cantonese product from overseas and also pay an import tax on it - but then that means the import tax technically isn’t part of the money going abroad.

Plus, the NYC bartender may buy a fancy wood coffee table or whatever New Hampshire produces. The Montreal bartender will get his wood table from Quebec. the Timbuctoo coffeehouse waiter will buy a locally-made pick-axe to destroy local historical monuments.

The nasty comment about Timbuctou is not called for and is inaccurate.

So, you’re arguing nobody [such as our hypothetical New Hampshire resident] should ever take a vacation, because if she spends her money in NYC, that won’t go to pay for state and local roads, and the NYC bartender is much less likely to spend his money on a New Hampshire product that the local Manchester bartender. Right?
(Though I’m not necessarily conceding that the NYC bartender is more likely to buy a NH product than a Montreal one. Montreal is much closer to upstate NH than NYC is. That was the whole point of my comparison).

Since I’m from Canada, and my last big vacations were China and Egypt - au contraire.

Basically, I’m discussing money flow. Vacations don’t matter unless you are Egypt, Cancun, or some place where it’s the major industry. In the end, it all evens out.

If too much money is spent overseas, the value of the US dollar goes down. People stop going abroad because it’s too expensive. (IIRC this was the situation with visiting Europe 10 or 20 years ago).

In terms of hypotheticals, the best you can do for local industry is buy local; adopt the 100-mile diet, buy a Ford or GM, buy a house made of US lumber, buy your gas from a US company that gets it from Texas or the gulf. however, if everyone did this, then foreign trade would grind to a halt.

The best bet for you personally is to buy what you want and need when you want and need it, from the best supplier in terms of price, quality, etc - i.e. the marketplace. If the market is out of balance, odds are the “invisible hand” will rebalance it.

Why do people arbitrarily compartmentalize the economy?

If spending money in Europe is bad, surely it is also bad for an Illinoisan like myself to vacation in California? For that matter, since I don’t live in Chicago, why should I spend my hard earned money in that remote burg? Clearly, if I’m not giving money directly to myself or my loved ones, I’m ruining the economy. Right?

No. I benefit when I can afford the things I want at prices I feel are reasonable. If I vacation in Egypt, it’s because I can’t get 5000 years of Egyptian history at any price back home. I paid for it because the benefits I receive are worth more to me than the money I spent. More benefits accruing to myself = more wealth. More benefits accruing to US vacationers as a whole = wealthier US economy.

This is Econ 101, guys. Free trade is a good thing, period. And even if it wasn’t, foreigners have to eat too. Do they somehow deserve less because they don’t inhabit the same patch of dirt you do?

It’s not “bad”. The real issue at discussion is, what happens if I spend outside vs. inside my currency zone, outside vs. inside my tax zone, etc.

As I said - if the imbalance is too severe, too much currency going out, then eventually things will rebalance by your currency being worth less. Too many US$ floating around in Europe, nobody wants then, it costs $2 instead of $1 to buy a EUro (so you can eat in Europe).

Similarly, if your city institutes a 10% sales tax to fix roads, what’s best? For who? Best for the city is you spend your money in the city and your streets get paved. Best for you is to go to the mall just over the city limit and buy everything there 10% cheaper. Eventually the city will learn to get along as cheap as their low-tax neighbours, and all will be well. Either they pave less roads, tear some up, or find a cheaper way to pave, or cut something else.

The best for you is to spend your money where you want, on what you want (and can afford). Eventually economic forces will take care of any out-of-balance situations.