<p>A lot of explanations about this matter depend on the fact that the foreign cash could be seen as a foreign assets. They say like "if you export a car and earn 100 yen, then it means that you have now the Japanese assets which are worth \$1 (suppose the exchange rate is 0.01) and this means $1 is invested into those yen money, so this implicitly alludes that the one dollar is flowed outward into Japan.</p>

<p>Okay, I get this so far. But what if I exchange the yen money with dollar at the Japanese bank before I come back to the US? I can see that clearly when I guess at the Japanese side. They got their yen money back into their money market, and it means the supply has been increased. But when I think about this from the view point of US side, well, I just don't get it at all. I went to Japan, sold a product, received yen, exchanged into dollar, and came back; The only things have come back to US are I and the dollar I earned. How can you see this as a dollar outflow?</p>

<p>Or what if I export the car to Zimbabwe where they use US dollar as an official money now? Exporting a car and earning nothing but 1 US dollar, then how come this is the outflow?</p>

CC BY-SA 4.0
2019-03-27T01:59:01.043Z
Setting aside dollarized countries: What do you suppose happens when you exchange the yen for dollars at the Japanese bank? Where does the Japanese bank get those dollars? Does your doing that at a Japanese bank contribute to offshore demand for dollars?
dismalscience
CC BY-SA 4.0
2019-03-27T02:45:26.917Z
@dismalscience Thanks. But do they have to suppose the Japanese bank get the dollars from the trade which happened recently? Say, Japan earned some dollars 2 years ago, and it didn't trade anything 1 year ago, and now the only thing traded is me selling a car, then is it okay for the dollars that moved to Japan 2 years ago to get involved with the accounting now?
dolco
CC BY-SA 4.0
2019-03-27T14:35:50.290Z
As a practical matter, it’s extremely unusual for a bank to hold on to more of any currency than is necessary to meet typical liquidity needs, so it’s usually safe to assume that the flow occurs in the same period.
dismalscience
CC BY-SA 4.0
2019-03-27T18:47:18.230Z
@dismalscience Thank you I guess I'm beginning to get the hang of it. Feel like just one more step left ahead. The trade of US to the dollarized countries, or between any nations which belong to EU.Do I have to think like that they use their currencies as if two different things but, to their surprise, after a trade they found out their currencies happened to be the same?
dolco
CC BY-SA 4.0
2019-03-27T23:12:58.523Z
In my opinion, that’s actually more complicated in some ways. An overseas purchase of a domestically produced item in a common currency basically changes a claim on a foreign bank into a claim on a domestic one. It’s effectively neutral with respect to currency valuation but can affect relative purchasing power between areas. For the Eurozone, you’ll maybe want to read up on Target2 balances.
dismalscience
CC BY-SA 4.0
2019-03-28T12:21:35.887Z
@dismalscience Thank you. Your comments were neat solutions to my problems and helped a lot.
dolco
<open-economy-macro><balance-of-trade>
Why is it so hard to understand NCO = NE?
dolco
# Why is it so hard to understand NCO = NE?

(Asked by: username_0 on 2019-03-27)

A lot of explanations about this matter depend on the fact that the foreign cash could be seen as a foreign assets. They say like "if you export a car and earn 100 yen, then it means that you have now the Japanese assets which are worth \$1 (suppose the exchange rate is 0.01) and this means $1 is invested into those yen money, so this implicitly alludes that the one dollar is flowed outward into Japan.

Okay, I get this so far. But what if I exchange the yen money with dollar at the Japanese bank before I come back to the US? I can see that clearly when I guess at the Japanese side. They got their yen money back into their money market, and it means the supply has been increased. But when I think about this from the view point of US side, well, I just don't get it at all. I went to Japan, sold a product, received yen, exchanged into dollar, and came back; The only things have come back to US are I and the dollar I earned. How can you see this as a dollar outflow?

Or what if I export the car to Zimbabwe where they use US dollar as an official money now? Exporting a car and earning nothing but 1 US dollar, then how come this is the outflow?

**Tags:** open-economy-macro, balance-of-trade

> **Comments:**
> **username_1**: Setting aside dollarized countries: What do you suppose happens when you exchange the yen for dollars at the Japanese bank? Where does the Japanese bank get those dollars? Does your doing that at a Japanese bank contribute to offshore demand for dollars?  
> **username_0**: @username_1 Thanks. But do they have to suppose the Japanese bank get the dollars from the trade which happened recently? Say, Japan earned some dollars 2 years ago, and it didn't trade anything 1 year ago, and now the only thing traded is me selling a car, then is it okay for the dollars that moved to Japan 2 years ago to get involved with the accounting now?  
> **username_1**: As a practical matter, it’s extremely unusual for a bank to hold on to more of any currency than is necessary to meet typical liquidity needs, so it’s usually safe to assume that the flow occurs in the same period.  
> **username_0**: @username_1 Thank you I guess I'm beginning to get the hang of it. Feel like just one more step left ahead. The trade of US to the dollarized countries, or between any nations which belong to EU.Do I have to think like that they use their currencies as if two different things but, to their surprise, after a trade they found out their currencies happened to be the same?  
> **username_1**: In my opinion, that’s actually more complicated in some ways. An overseas purchase of a domestically produced item in a common currency basically changes a claim on a foreign bank into a claim on a domestic one. It’s effectively neutral with respect to currency valuation but can affect relative purchasing power between areas. For the Eurozone, you’ll maybe want to read up on Target2 balances.  
> **username_0**: @username_1 Thank you. Your comments were neat solutions to my problems and helped a lot.  

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## 0 answers

