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.
Year
Exports
Imports
Difference
1970
59.7
55.8
____
1980
280.8
293.8
____
1990
552.4
629.7
____
1995
811.9
902.6
____
2000
1093.2
1475.3
____
2005
2010
2011
1035.1
1839.8
2087.6
2027.8
2356.7
2665.8
____
____
____
Leading Trading Partners of the U.S.
–––––––– Percent of Total U.S. Trade, 2002 ––––––––
–––––––– Percent of Total U.S. Trade, 2006 –––––
–––
Canada
19.8% 18.5%
Mexico
China
Japan
Germany
United Kingdom
South Korea
Taiwan
France
Malaysia
All other countries
11.5%
11.9%
11.9%
9.1%
7.2%
8.6%
4.9% 4.5%
3.9% 3.4%
3.1% 2.7%
2.5% 2.1%
2.3% 2.1%
1.8% 1.7%
34.4%
32.2%
• 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.
Partner
% Exports
European Union 17.0
Canada
19.0
Japan
5.0
Mexico
14.0
China
7.0
% Imports
16.0
14.0
6.0
12.0
18.0
2013
Source: 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 lowopportunity 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:
Canada 1 t wheat = ___ ton soy
1 t soy = ___ ton wheat
Brazil 1 t wheat = ___ ton soy
1 t soy = ___ ton wheat
Advantage in wheat? __________
Advantage in soybeans? ________
With one unit of resources:
Canada
8 wheat or 4 soybeans
Brazil:
4 wheat or 8 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
Totals: __ wheat and __ soybeans
Protectionism:
With two units of resources, produce good
other than comparative advantage
- Canada: __ wheat and __ soybeans
-Brazil: __ wheat and __ soybeans
Totals: __ wheat and __ soybeans
Bonsai
Areca
Guns
12
8
4
0
Butter
0
2
4
6
Guns
16
12
8
4
0
Butter
0
1
2
3
4
Production Possibilities - Mexico
Product
A
B
C
D
E
Avocados
0
20
24
40
60
Soybeans
15
10
9
5
0
1 S = __ A
1 A = __ S
Production Possibilities - US
Product
A
B
C
D
E
1 S = __ A
Avocados
0
30
33
60
90
1 A = __ S
Soybeans
30
20
19
10
0
US should produce?
Mexico should produce?
Terms of Trade? ___ A for ___ S
• Columns (1) and (2) show the daily per worker output of
the food & clothing industry in the U.S. and Japan.
Output per worker day
Food Clothing
(1)
(2)
Country
United States
Japan
Change in total output
2
3
1
9
Potential change in output*
Food Clothing
(3)
(4)
+6
-3
+5
-3
+9
+6
* Change in output if US shifts 3 workers from clothing to food industry and if Japan shifts one from food to the clothing.
• 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.
PPC Before Specialization and Trade
• 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.
• Each of these points lay along the production possibilities
curve (PPC) of the respective nation.
Clothing
United States
(million units)
450
400
350
Production possibilities, U.S.
300
250
M
200
150
US1
100
50
Clothing
450
R
375
Production possibilities, Japan
300
225
J1
150
75
S
N
100
200
300
Food
400 (million units)
Japan
(million units)
75
150
Food
(million units)
Consumption Possibilities with Trade
• 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
United States
(million units)
450
400 O
350
300
250
M
200
150
US1
100
50
100
Clothing
450
Consumption possibilities
of U.S. with trade
Japan
(million units)
R
Consumption possibilities
of Japan with trade
375
300
225
J1
150
75
S
N
200
300
Food
400 (million units)
75
150
T
Food
400 (million units)
Consumption Possibilities with Trade
• 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.
Clothing
United States
(million units)
450
400 O
350
300
250
M
200
150
US1
100
50
100
Clothing
Japan
(million units)
450
R
375
300
250
225
US2
J1
J2
150
75
200
300
Food
400 (million units)
T
S
N
75
150
Food
200
400 (million units)
Consumption Possibilities with Trade
• 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.
• 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.
Clothing
United States
(million units)
450
375
300
250
225
US imports
US2
Japan
(million units)
R
Japan exports
450
400 O
350
300
250
M
200
150
100
50
Clothing
J2
150
75
US exports
100
200
300
N
Food
400 (million units)
Japan imports
S 150 200
T
Food
400 (million units)
Exports
1985%
2010%
Foods, feeds, beverages
11.0
8.4
Industrial supplies
26.7
30.6
Capital goods
33.8
34.9
Automotive
10.5
8.8
5.8
13.0
Non-Food consumer goods
Imports
1985%
2010%
6.5
4.8
Capital goods
33.8
31.5
19.3
23.5
Automotive
19.9
11.8
Non-Food consumer goods 20.3
25.3
Foods, feeds, beverages
Industrial supplies
Some U.S. Exports
Quantity of Exports Quantity of Imports
($ billions)
($ billions)
Autos
Food and Beverage
Capital Goods
$146
$133
$537
$298
$110
$549
Consumer Goods
Passenger Fare
$182
$39
$516
$35
Other transportation
$45
$55
Why do similar high-income economies
engage in intra-industry trade?
The division of labor leads to learning,
innovation, and unique skills.
Economies of scale
Gains from Specialization and Learning
In working on very specific and particular
products, firms in certain countries
develop 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.
Does Anyone Lose as a Result of International Trade?
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.
A Hard Lesson to Learn
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.
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.
U.S. Market
Sd
Price
Pw
a
b
Sw
World Market
Price
Sw
Pw
c
Pn
Dw
Dd
Qc
Qn
Qp
Soybeans
(bushels)
Qw
Soybeans
(bushels)
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. Market
Sd
Price
Pw
a
b
Sw
World Market
Price
Sw
Pw
c
Pn
Dw
Dd
U.S. exports
Qc
Qn
Qp
Soybeans
(bushels)
Qw
Soybeans
(bushels)
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.
U.S. Market
World Market
Price
Sd
Price
Sw
Pn
a
Pw
Dd
Dw
Qn
Shoes
Qw
Shoes
Foreigners Have a Comparative
Advantage
• 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.
U.S. Market
World Market
Price
Sd
Price
Sw
a
Pn
Pw
b
c
Sw
Pw
Dd
Dw
U.S. imports
Qp Qn Qc
Shoes
Qw
Shoes
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 country
6.
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.