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International Trade
The Trade Sector of the US
Growth: - In 1975, exports and imports were each approximately 8% of the U.S. economy. - In 2000, exports accounted for 11.2% of GDP and imports made up 14.9%.
Major Trading Partners:- Canada, Mexico, and Japan -China, Europe
International Trade Is of Increasing Importance to the US
U.S. International Trade in a World Context
International Trade as a Percentage of GDP
International trade is still less important to the United States than to most other countries.
1980 280.8 293.8 ____
Year Exports Imports Difference1970 59.7 55.8 ____
2005 1035.1 2027.8 ____
2000 1093.2 1475.3 ____
1995 811.9 902.6 ____
1990 552.4 629.7 ____
2010 1839.8 2356.7 ____
2011 2087.6 2665.8 ____
• Today, Canada, Mexico, China, and Japan are the leading trading partners with the United States.
• The impact of international trade varies across industries. --some compete effectively, some do not.
Leading Trading Partners of the U.S.
Taiwan
South Korea
United Kingdom
Germany
Japan
China
Mexico
Canada
–––––––– Percent of Total U.S. Trade, 2002 ––––––––
All other countries
Malaysia
France
2.5%
3.1%
3.9%
4.9%
8.6%
9.1%
11.9%
19.8%
32.2%
1.8%
2.3%
2.1%
11.9%
2.7%3.4%
4.5%
7.2%
11.5%
18.5%
34.4%1.7%2.1%
–––––––– Percent of Total U.S. Trade, 2006 ––––––––
17.019.0
5.014.0
7.0
European UnionCanadaJapanMexicoChina
Partner % Exports16.014.0
6.012.018.0
% Imports
2013Source: http://www.census.gov/foreign-trade/ statistics/highlights/toppartners.html
Gains from Specialization and Trade
Law of Comparative Advantage• A group of individuals, regions, or nations can
produce a larger joint output if each specializes in the production of goods in which it is a low-opportunity cost producer and trades for goods for which it is a high opportunity cost producer.
Gains from Specialization and Trade• International trade allows each country to
specialize according to the law of comparative advantage.
• Each country can produce those goods that it can produce at a low opportunity cost.
• Trading partners can consume a wider variety of goods than they could produce domestically.
Absolute advantage: The ability to produce more of a good or service than competitors when using the same amount of resources.
With one unit of resources:
- Canada: 8 tons of wheat or 4 tons of soybeans
-Brazil: 4 tons of wheat or 8 tons of soybeans
Opportunity Costs:
Advantage in wheat? __________
Canada 1 t wheat = ___ ton soy 1 t soy = ___ ton wheat
Brazil 1 t wheat = ___ ton soy 1 t soy = ___ ton
wheat
Advantage in soybeans? ________
Canada
Brazil
With one unit of resources:Canada8 wheat or 4 soybeans
Brazil: 4 wheat or 8 soybeans
Totals: __ wheat and __ soybeans
With two units of resources, 1 for wheat 1 for soybeans
-Canada: __ wheat and __ soybeans-Brazil: __ wheat and __ soybeans
Totals: __ wheat and __ soybeans
With two units of resources, produce good with comparative advantage
- Canada: __ wheat and __ soybeans-Brazil: __ wheat and __ soybeans
Protectionism:
Totals: __ wheat and __ soybeans
With two units of resources, produce good other than comparative advantage- Canada: __ wheat and __ soybeans-Brazil: __ wheat and __ soybeans
Areca
Guns Butter12 013 214 40 6
Bonsai
Guns Butter16 0
12 1 17 218 30 4
Production Possibilities - MexicoProduc
tA B C D E
Avocados
0 20 24 40 60
Soybeans
15 10 9 5 0Production Possibilities - USProduct A B C D E
Avocados
0 30 33 60 90
Soybeans
30 20 19 10 0
1 S = __ A
1 S = __ A
1 A = __ S
1 A = __ S
US should produce?Mexico should produce?Terms of Trade? ___ A for ___ S
Country
United States Japan
Output per worker day Potential change in output* Food (1)
Clothing (2)
Clothing (4)
Food (3)
* Change in output if US shifts 3 workers from clothing to food industry and if Japan shifts one from food to the clothing.
Change in total output
2 1 3 9
+ 6 - 3 - 3 + 9
+ 5 + 6
• Columns (1) and (2) show the daily per worker output of the food & clothing industry in the U.S. and Japan.
• If the U.S. moves 3 workers from clothing to food, it produces 6 more units of food and only 3 fewer of clothing.• If Japan moves 1 worker from food to clothing, it produces 9 more units of clothing and only 3 fewer of food.
• With such a reallocation of labor, the U.S. and Japan are able to increase their aggregate output of both food and clothing.
United States Japan
150
150
300
450
375
225
75
75Food(million units)
PPC Before Specialization and Trade
Food(million units)
Production possibilities, U.S.
Production possibilities, Japan
• Output of the labor force of both the US (200 million) and Japan (50 million) given the production costs of food and clothing from the previous slide.
• In the absence of trade, consumption possibilities will be restricted to points like US1 in the U.S. and J1 in Japan.
Clothing(million units)
Clothing(million units)
100 200 300 400
100
200
300
250
150
50
M
350
400
450
N
US1
J1
• Each of these points lay along the production possibilities curve (PPC) of the respective nation.
S
R
United States Japan
Food(million units)
Consumption Possibilities with Trade
Food(million units)
• Specialization and trade expand consumption possibilities.• If the U.S. trades food for clothing (1-for-1), it can
specialize in the production of food and consume along the ON line (rather than its original production-possibilities constraint, MN).• Similarly, if Japan trades clothing for food (1-for-1), it can specialize in the production of clothing and consume any combination along the RT line (rather than its original, RS).
Clothing(million units)
Clothing(million units)
Consumption possibilitiesof U.S. with trade
100 200 300 400
100
200
300
M250
150
50
US1
N
350
400
450O
150
150
300
450
375
225
75
75
J1
R
400
T
Consumption possibilitiesof Japan with trade
S
United States
100 200 300 400
100
200
300
M
Japan
150
150
300
450
S
250
150
50
375
225
75
75
US1
J1
NFood(million units)
R
Consumption Possibilities with Trade
Food(million units)
• For example, with specialization and trade, the U.S. could increase its consumption from US1 to US2, gaining 50 million units of clothing and 100 million units of food.
• Simultaneously, Japan could increase consumption from J1 to J2, a gain of 125 million units of food and 25 million units of clothing.
350
400
450
Clothing(million units)
Clothing(million units)
400
O
T
J2
200
250
US2
United States
100 200 300 400
100
200
300
M
Japan
150
150
300
450
S
250
150
50
375
225
75N
Food(million units)
R
Consumption Possibilities with Trade
Food(million units)
• How exactly do the U.S. and Japan consume at US2 and J2?• The U.S. produces 400 million units of food, consumes 200
million, and exports 200 million to Japan.
350
400
450
Clothing(million units)
Clothing(million units)
400
O
T
J2
250
200
US2
US
imports
Japan importsUS exports
Japan exports
• Japan produces 450 million units of clothing, consumes 250 million, and exports 200 million to the U.S..
• They consume more together than they could individually.
Exports 1985% 2010%
Foods, feeds, beverages
Non-Food consumer goods
Automotive
Capital goods
Industrial supplies
11.0 8.4
5.8 13.0
10.5 8.8
33.8 34.9
26.7 30.6
Imports 1985% 2010%
6.5 4.8
20.3 25.3
19.9 11.8
19.3 23.5
33.8 31.5
Foods, feeds, beverages
Non-Food consumer goods
Automotive
Capital goods
Industrial supplies
Some U.S. Exports Quantity of Exports ($ billions)
Quantity of Imports ($ billions)
Autos $146 $298
Food and Beverage $133 $110
Capital Goods $537 $549
Consumer Goods $182 $516
Passenger Fare $39 $35
Other transportation $45 $55
Economies of scale
Why do similar high-income economies engage in intra-industry trade?The division of labor leads to learning, innovation, and unique skills.
Gains from Specialization and Learning
In working on very specific and particular
products, firms in certain countriesdevelop unique and different skills
The US may be exporting machinery for manufacturing with wood, but importing machinery for photographic processing.
Splitting up the Value Chain?
1. The Value Chain is all of the stages in the production process.
2. Due to improvements in communication technology, sharing information, and transportation, it has become easier to split up the value chain.
3. All of these steps can be split up among different firms operating in different places and even different countries.
Some firms win, and some lose.
The losers are likely to try to convince their governments to interfere by barring imports of the competing products from the other country or by imposing high tariffs on them.
Does Anyone Lose as a Result of International Trade?
Exports and Imports are Linked• Exports provide the foreign exchange
needed for the purchase of imports. • Imports provide trading partners with the
currency needed to purchase exported goods and services.
• Therefore, restrictions that limit one will also limit the other.
A Hard Lesson to Learn
Pn
Pw
QnQc Qp
a bPw
Qw
Soybeans(bushels)
Price
Soybeans(bushels)
Price
U.S. Market World Market
U.S. Has a Comparative Advantage• The price of soybeans and other internationally traded
commodities is determined by the forces of supply and demand in the world market.
• If U.S. soybean producers were prohibited from selling to foreigners, the domestic price would be Pn.
• Free trade permits U.S. soybean producers to sell Qp units at the higher world price of Pw.
Sw
Sd
Dd
c
Sw
Dw
Pn
Dd
Pw
QnQc Qp
a b
c
Sd
Pw
Qw
Soybeans(bushels)
PriceSw
Dw
Sw
Soybeans(bushels)
Price
U.S. Market World Market
U.S. Has a Comparative Advantage• At the world price of Pw, the quantity (Qp – Qc) is exported.
• Compared to the no-trade situation, the producers’ gain from the higher price (Pw b c Pn) exceeds the cost imposed on domestic consumers (Pw a c Pn) by the triangle (area) a b c.
U.S. exports
Pn
Qn
Pw
Qw
Shoes
Price
Sw
DwShoes
Price
U.S. Market World Market
Foreigners Have a Comparative Advantage
• Consider the international market for manufacturing shoes.• In the absence of trade, the domestic price would be Pn.• Since many foreign producers have a comparative
advantage in the production of shoes, international trade leads to lower prices Pw.
Sd
Dd
a
Dd
Qn
a
Sd
Pw
Qw
Shoes
Price
Sw
DwShoes
Price
U.S. Market World Market
• At the price Pw, U.S. consumers demand Qc units of which (Qc – Qp) are imported.
• Compared to no trade, consumers gain Pn a b Pw, while domestic producers lose Pn a c Pw.
• A net gain of a b c results.
Pw
b c
Pn
Qp Qc
U.S. imports
Sw
Foreigners Have a Comparative Advantage
1.Measured as a share of the economy, the size of the trade sector (exports plus imports) of the United States has
a. been increasing since 1980, but it declined during 1960–1980.
b. been relatively constant during the last four decades.
c.increased by about 10 percent during the last four decades.
d. approximately doubled since 1980 and tripled since 1960.2.A U.S. trade policy that restricts the sale of foreign goods in the U.S. market will
a. reduce the demand for U.S. export goods since foreigners will be less able to buy our goods if they cannot sell to us.
b. benefit producers in industries that export goods.c.increase the nation’s income since it protects
domestic jobs.d. enhance economic efficiency by allocating more
resources to the areas of their greatest comparative advantage.
True or False
1. The purchase of goods and services from abroad is called exporting.
2. The largest category of U.S. exports is foods and beverages.
3. The country with which the United States carries on the largest amount of international trade is Canada.
4. The scarcity problem can be eliminated by increasing production through specialization.
5. A country is said to have a comparative advantage over another country if it can produce a product at a lower opportunity cost than can the other country6. The availability of appropriate markets and
the ability to trade are necessary if countries are to specialize in their production
7. Trade restrictions must be imposed between countries if they are to gain the full benefits of production according to comparative advantage.
