The International Puzzle -- Fitting The Pieces Together The US economy doesn't function in a vacuum. If you need evidence of this, just look at the "made in _____" tag on something you bought recently. Chances are the country named on it is not the United States.				> Home > Glossary > Support
		Trade with foreign countries has an impact on the US economy. The economic health of the rest of the world affects US economic health. If other countries are booming, their citizens will have more money to buy our goods, or invest in our financial markets, helping performance of our companies and stocks. If their economies falter, they won't buy as much at Uncle Sam's store.
		Trade effects
		Trade among countries is an important component of economic interdependence. "You buy my products, I'll buy yours" is a good way to give consumers in all countries more choice, possibly at lower prices.
		But this interdependence can have repercussions when things turn sour, as the world saw during the 1997-98 Asian crisis. (That was not the first example, nor will it be the last.) When Asian economies slowed, those countries bought less from US companies. Also, US companies that relied on supplies from Asia faced delays or cancellations in deliveries, affecting their own production.
		It suddenly became apparent just how many US companies had dealings in Asia -- and many of those companies saw their stock prices fall as sales and profits went down.
		In the end, intervention by the Fed helped stabilize the US market. But the episode served as a reminder of the delicate balance in the world economy.
		Trade Deficit and Trade Surplus
		When Americans spend more buying foreign goods than the rest of the world spends to buy our products, the United States is said to have a trade deficit. Is this bad?
		Possible negative effects of a trade deficit are: Unemployment Economic slowdown
		Possible positive effects of a trade deficit include: Greater choice of products for consumers Lower prices for consumers
		When the United States sells more goods to foreign countries than it buys from them, it has a trade surplus.
		Possible negative effects of a trade surplus include: Higher prices Higher interest rates More limited choices for consumers
		Possible positive effects of a trade surplus include: Increased economic activity Possible increase in company earnings
		When trying to judge the effect of a trade surplus or deficit on the overall economy, you also have to take into account other factors such as exchange rates and whether investors in other countries are buying or selling US dollars.
		Exchange rate effect
		As an investor, you need to be aware of the effect that exchange rates may have on your investments. This is especially important if you buy stock in foreign companies, and also if you invest in a US company that is active internationally.
		When you invest in another country's securities, you have more than one potential source of return or loss. Of course, you have the actual return on what you invest in. But you also have to look at any change in the exchange rate between the dollar and the currency of the country you are investing in. That will affect your overall return.
		Here's an example. Say you invest in a company in Indonesia that produces batik cloth. You buy stocks that are denominated in Rupiahs, the Indonesian currency. You spend $10,000, which equals 86 million Rupiahs (1 dollar = 8,600 Rupiahs. Really.). Then you sit back and watch as batik cloth becomes the hottest thing to hit fashion since platform shoes and bell-bottoms. Your investment has a 25 percent return in the first year! You now have 107 million Rupiahs! Great!
		Not so fast. Say that in that same year, inflation in Indonesia skyrocketed and the Rupiah became worth less against the dollar. (That is the same as the dollar appreciating against the Rupiah, or the Rupiah depreciating against the dollar.) Instead of 8,600 Rupiahs to the dollar, the rate is now 11,000 Rupiahs to one dollar. So your 107 million Rupiahs (divided by 11,000) are worth $9,727. Surprise! If you convert your money back into dollars now, you'll lose $273, even though your investment returned 25 percent.
		(Of course, if the Rupiah had APPRECIATED against the dollar you'd be laughing all the way to the bank, wearing your batik bell-bottoms and platform shoes.)
		That is a very simple illustration of why you have to be careful when you invest in a foreign country. You need to pay attention to factors such as the economic and political stability of the country, to make sure your investment won't be eaten up by events beyond your control.
		But don't think you should avoid international investing altogether. Au contraire!
		A well-considered international investment is an important part of a well-diversified portfolio, and can actually help smooth out your returns over time because foreign markets tend to move differently from the US market (they have negative correlation).

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