We might be able to make better sense of some of the themes in this chapter by studying the most interesting economy in the world: That’s the nation of Youville, population one. It was formed when you—and only you—seceded from the United States. Not much changed—you still live at your current address and go about your regular life—but now anything that enters or exits your home counts as an international transaction. The economy of Youville will help illustrate what we can learn from a country’s balance of payments.
Let’s start by considering Youville’s imports, the most obvious of which are the food and clothes you import from stores beyond your national borders. Youville, also imports services, the most important of which is the big tuition bill you pay each year for imported educational services. As for Youville’s exports, if you hold a part-time job—say, tutoring local high school students—then you’re exporting tutoring services. If you’re at all like most students, the money you send “abroad” to pay for food, clothing, and tuition exceeds the income you’re receiving, and so Youville is running a current account deficit.
If you’re spending more than you’re earning, how do you pay the bills? Most folks in college rely on student loans. These count as financial inflows into Youville, and so Youville runs a financial account surplus. Your current account deficit must be equal to your financial account surplus, because you can only spend more than your income if you have financing coming in to pay those bills.
Should Youville be worried about its current account deficit? It depends. If you’re cutting class and loading up on debt so that you can party now without worrying about the money you’ll have to pay back later, you’re making a mistake. In this case, the current account deficit is a signal that Youville will eventually face economic trouble when those bills come due.
But if you’re studying hard, and improving your skills, you’ll be well-placed to get a higher-paying job later. Remember, over their lifetime a typical college graduate will outearn a typical high school graduate by more than a million dollars. In this case, there’s no reason to worry about Youville’s current account deficit, as repaying those debts won’t be too difficult. Indeed, the current account deficit is simply a side effect of using “foreign” financing to help fund productive investments that will underpin Youville’s future economic growth.
Finally, Youville illustrates a much broader trend. It’s a nation that’s fully integrated into the world’s economy. The population in Youville specialized in a few tasks and it relies on the global economy beyond its borders for most things. It’s like globalization on steroids. Now I’m not suggesting that the U.S. economy is ever going to become this integrated into the global economy. But you can bet that through your lifetime, the United States is going to become more like Youville, and international trade and global financial flows will become even more important. And that in turn, means that the material you’ve learned in this chapter is only going to become even more valuable.