United States International Trade in Goods and Services
A Case Study
Date of Announcement
November 19, 2002
Dates of Future Announcements
December 18, 2002
Announcement
The U.S. international trade deficit in goods and services decreased by $0.3 billion to
$38.0 billion in September from a revised $38.3 billion in August as exports decreased
(-$0.3 billion) and imports decreased as well (-$0.6 billion).
(For the complete announcement, see www.census.gov/indicator/www/ustrade.html.)
Notes to Teachers
Paragraphs that appear in italics are included only in the teacher’s version and are
excluded from the student version. The discussions, student questions, and activities in
the case studies early in the semester are at basic levels and will gradually increase in
complexity later in the semester.
Goals of the International Trade Case Study
The purpose of the international trade case study is to provide the most recent data
on international trade, interpretations of trends and causes of changes in trade deficits
and surpluses, and a number of relevant student and classroom activities.
Definition of Balance of Trade
A country’s balance of trade (or net exports) is the value of its exports minus its
imports. If the result is positive, that is, exports are greater than imports, we describe it
as a surplus in the balance of trade. A trade deficit occurs when imports are greater than
exports.
Net exports are equal to exports minus imports. Net exports are positive if exports
exceed imports and are negative if imports exceed exports.
Data Trends
September exports were $82.2 billion and imports were $120.2 billion, leading to an
overall trade deficit of $38.0 billion. Exports of goods increased by $0.1 billion and
exports of services decreased by $0.4 billion in September. Imports of goods decreased
by $0.5 billion and services decreased by $0.2 billion.
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The trade deficit (exports minus imports) increased rapidly from March 1998 to
September of 2000. From September 2000 to March 2001, the monthly trade deficit
remained relatively stable around $33 billion. Between March and September of 2001,
imports fell more rapidly than exports, causing the trade deficit to decrease from $33
billion to $28.4 billion. Following the events of September 11, both imports and exports
of goods and services decreased dramatically. (For more information on the impact of
September 11 tragedy on international trade, see the September and October, 2001, case
studies.)
Figure 1
After September of 2001, the levels of exports and imports more closely
approximated the previous levels and the trade deficit returned to the $28 billion to $31
billion range. Imports increased as the economy began to recover from the recession and
as oil prices increased. Exports increased in tandem, but were not sufficient to offset the
increase in imports. As oil prices continued to increase and the economy continued to
recover, the trade deficit has moved higher, reflected in approximately $35 billion deficits
of June, July, August, and now September.
Figure 2
Exports and imports in dollar terms have been increasing for the last 30 years.
Exports and imports as percentages of GDP have been increasing throughout most of
those years. As percentages of GDP, exports and imports rose rapidly in the 1970s, were
steady in the 1980s, and began to rise again in the 1990s. The trade deficit, as a
percentage of GDP, increased dramatically in the 1980s, shrank in the late 1980s and
early 1990s, then began to rise again in the late 1990s. Over the last several years,
imports have continued to rise as a percentage of GDP and exports have fallen.
Exports are currently 9.8 percent of GDP; imports are 13.9 percent; and the trade
deficit is 4.1 percent of GDP.
Figure 3
Components of International Trade
The United States imports and exports both goods and services.
Figure 4
As shown in the graph to the left, currently goods
account for 71 percent of our exports and 83 percent
our imports.
Services account for 29 percent of our exports and 17
percent of our imports. (The spike in the graph in the
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percentage of imports that is made up of goods and the fall in the percentage that is
services is due to the rather larger absolute decrease in imports of services during
September.)
The major categories of goods imported and exported are:
 Capital goods (aircraft, semiconductors, computer accessories, machinery,
engines)
 Vehicle parts and engines
 Industrial materials and supplies (metals, energy, plastics, textiles, lumber)
 Consumer goods (pharmaceuticals, apparel, toys, TV/VCRs, furniture, gem
stones)
 Food, feed, and beverages.
The relative contributions of each to U.S. exports and imports for the year 2001 are
illustrated in the two pie charts below.
Figures 5a and 5b
In 2001, the United States exported more capital goods (for example, semiconductors,
computer accessories, and electrical equipment and machines) than we imported. Food,
feed, and beverages exported and imported were approximately equal. But in automotive
products, consumer goods, and industrial supplies (crude oil, chemicals, newsprint,
plastics, and others), we imported significantly more than we exported.
Automobiles (7%), semiconductors (5%), computers and accessories (5%), aircraft
(5%) and telecommunications equipment (3%) are the largest components of U.S.
exports. Among imports, automobiles (14%), crude oil (6%), computer accessories (6%),
and apparel (4%) are the most significant goods categories.
The main categories of services include travel, fares, transportation, and
royalties/license fees.
 Travel: Goods and services purchased by international visitors to the United
States and U.S. citizens who are traveling abroad (food, lodging, recreation, gifts).
(25% of exports, 29% of imports)
 Passenger fares: The transportation expenditures of people from the United States
traveling abroad and individuals from other countries traveling to the United
States (primarily airfare). (6% of exports, 11% of imports)
 Transportation: The transportation costs for goods moved by ocean, air, pipeline,
and railway to and from the United States (5% of exports, 7% of imports)
 Royalties and license fees: Fees for patents, copyrights, and trademarks. (14% of
exports, 8% of imports)
 Other: Government, defense and private services.
Changes in Imports and Exports of Goods and Services
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Table 1
The decrease in exports in September was due to a slight increase in goods exported
with a larger decrease in services exported. The U.S. exported more capital goods, but
this was somewhat offset by fewer exports of automotives and automotive parts,. The
decrease in services exported was due to sharp decreases in travel and passenger fares,
which accounted for almost the entire decrease in services exported.
The decrease in imports during September was due to a decrease in goods imported primarily decreased imports of consumer goods and industrial supplies. Service imports
decreased slightly.
A Note
Ports located on the west coast of the United States were closed during the
last two days of September (and the first eight days of October) due to a labormanagement dispute. The impact, if any, cannot be separately identified in the
source data. More of the impact is likely to be felt in the release of the October data.
Analysts did estimate that the dispute cost the U.S. economy as a whole up to $1 billion
per day, but it is difficult to estimate its impact on the balance of trade as goods could not
be received or shipped out. The union says it's trying to save jobs that management either
wants to eliminate through new technology or by contracting out. The two sides are also
at odds over pensions and other benefits. On October 9th, President Bush ordered the
longshoremen back to work, citing national interests under the Taft-Hartley Act.
International Trading Partners
Figure 6
The graph above shows what percentages of United States imported goods come from
each of our major trading partners and the percentage of our exported goods going to
those same countries. These are percentages of United States exports and imports and do
not necessarily represent a trade surplus or deficit with individual countries. They simply
show the relatively importance in trade of goods with each listed country.
As you can see in the graph, 25% of goods exported from the U.S. are sent to Canada,
while 20% of all U.S. goods imported come from Canada. Trade with Japan accounts for
13% of U.S. imports and 9% of U.S. exports. Still we have trade deficits in goods with
both Canada and Japan. Our largest goods trade deficit is with China. The U.S. does
have goods trade surpluses with the Netherlands, Australia, Belgium, Hong Kong, and
Egypt.
The Effects of Price Levels and Changes in Real GDP on Exports and Imports
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Exports and imports are influenced by a variety of factors. Increases in income in the
United States will increase the demand for all goods and services, including those that are
imported. Thus, imports will rise as incomes increase. Increases in income in other
countries have a positive effect on our exports. Decreases in income here cause exports
to fall. Decreases in income among our trading partners cause our exports to fall.
Changes in prices here and abroad are also important. If we experience more
inflation here than the rest of the world is experiencing, our goods cost more and thus our
imports will rise and exports will fall. The reverse is true if the rest of the world
experiences a greater rate of inflation than we do in the United States.
Changes in tastes will also affect import and export levels. If U.S. residents consume
more fruit and vegetables, imports will increase. As the rest of the world finds U.S.
software and airplanes more attractive, our exports will rise.
Changes in exchange rates influence exports and imports. Exchange rates are the
prices at which currencies are exchanged. For example, one U.S. dollar can buy (or be
exchanged for) approximately 10 Mexican pesos in international currency markets. Or,
one Mexican peso costs about 10 cents. Most exchange rates are determined in open
markets, and the rates depend upon the supply and demand for each currency.
If the international value (price) of the dollar increases (say from 10 pesos per dollar
to 12 pesos per dollar), U.S. goods become more expensive for Mexicans and goods from
Mexico become cheaper for people in the United States. Before the increase in the
international value of the dollar, automobiles costing $20,000 in the United States cost an
individual in Mexico 200,000 pesos ($20,000 times 10 pesos per dollar). After the
change in the value of the dollar, the same car will cost will cost someone in Mexico
240,000 pesos ($20,000 times 12 pesos per dollar). Thus, Mexicans will purchase fewer
U.S. cars.
At the same time, Mexican goods become less expensive for people in the United
States. For example, a Mexican vacation stay that costs 40,000 pesos formerly cost
someone from the United States $ 4,000 (40,000 pesos times $.10 per peso). Now, the
vacation is cheaper for the United States as the cost of a peso falls from $ .10 to $ .083
(40,000 pesos times $ .083 per peso = $ 3,320).
There is a good bit of discussion in business and economics sections of newspapers
about the “high” value of the dollar and whether or not it we would be better off if it
came down. One of the reasons for concern with it value in terms of other currencies, is
that while it lowers the costs of the goods and services we import, it increases the costs of
our exports. Export producing industries are thus hurt by the “high” value of the dollar.
The Cause of Trade Deficits
One of the more difficult macroeconomic concepts is the determination of trade
deficits or surpluses. If exchange rates fluctuate with the international supply and
demand for a currency and if there are free flows of capital and goods, the relation of
saving and investment in an economy determines the balance of trade in economies. For
example, if saving (of all forms – personal, corporate, and government) is less than the
amount of investment spending in an economy, there will tend to be upward pressure on
interest rates (actually real interest rates). Those increases will tend to increase the
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international demand for the domestic currency. That increased demand will cause the
international value of the currency to increase. In turn, the rise in the international value
of the currency will make the country's exports more expensive for those abroad and thus
exports will decrease. The country's imports will be less expensive and thus imports will
increase. The result of the increase in imports and fall in exports will be a rising trade
deficit (or a falling trade surplus).
In the current context of falling trade deficits, the explanation is exactly the opposite.
The danger in asserting that opposite cause with a great deal of confidence is that the
decreases in the deficit may be only temporary changes and not reflective of changes in
the trend.
Interest in Tariffs and Quotas
This year, the U.S. has established tariffs on steel and lumber imports and Canada and
the European Union have threatened to place tariffs on goods exported from the U.S.
Concern with rising unemployment during recessions and rising trade deficits often
encourage governments to consider protecting domestic industries. Other countries often
respond with tariffs of their own on other goods.
The U.S. International Trade Commission recently decided to uphold a 27 percent
tariff on Canadian lumber imported into the U.S. These tariffs were imposed after U.S.
lumber producers filed complaints that the Canadian government was subsidizing
Canadian producers by charging them artificially low prices to cut timber on public land.
This Canadian lumbar was then supposedly "dumped" into the U.S. lumber market at a
lower price than domestic lumber could be produced. Domestic producers were hurt as a
result.
The tariff on Canadian lumber acts to boost the price of Canadian lumber imported
into the U.S. As U.S. demand for lumber increases, it is hoped that this will increase the
prices and quantities of U.S. lumber thereby benefiting U.S. timber companies. The
impact of these tariffs could be quite large. Lumber imported from Canada accounted for
one-third of the U.S. lumber market last year.
In March, tariffs ranging up to 30 percent were placed on a variety of kinds of steel.
The purpose was the same as the lumber tariffs – the production of U.S. firms and
workers.
In both cases, the benefits of the tariffs are the jobs and profits of the industries
directly affected. However, consumers and industries that purchase the goods pay the
costs. In one estimate, the cost of each steel job saved, that is the increased prices of
domestic and imported steel and the increased prices of goods using the steel, will likely
be as much as $584,000 per job saved per year. Obviously, tariffs can be quite expensive
ways of providing jobs.
The establishment of tariffs is unlikely to reduce trade deficits and unlikely to have
long-run positive effects on unemployment. The news attention being given to tariffs
does offer an opportunity for classroom discussion of the benefits and costs of trade
policies.
Interactive Questions for Students
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1. What does it mean if a country has a balance of trade that is zero?
2. What does it mean if a country has a balance of trade that is in surplus?
3. If we are currently experiencing a trade deficit of $38 billion, what will happen to the
trade deficit if exports decrease by $1 billion and imports decrease by $2 billion?
4. If the growth in spending is less rapid in the U.S. than the rest of the world, what will
be the likely effect on net exports? Explain why.
5. If inflation is lower in the United States than in countries with which the United
States trades, what will likely happen to U.S. net exports, imports, and net exports?
Why?
6. If tariffs are increased, what is the likely effect on imports and exports? (Assume that
exchange rates stay constant.)
Sample Answers to Interactive Questions
(The answers should pop-up.)
1. What does it mean if a country has a balance of trade that is zero?
It means that imports exactly equal exports.
2. What does it mean if a country has a balance of trade that is in surplus?
It is exporting more goods and services than it is importing. It is described as a
"surplus" because the U.S. is receiving more dollars from abroad than it is sending
abroad.
3. If we are currently experiencing a trade deficit of $38 billion, what will happen to the
trade deficit if exports decrease by $1 billion and imports decrease by $2 billion?
The trade deficit will go to $37 billion. Exports are added and imports subtracted to
calculate the balance of trade. The $1 billion decrease in exports increases the
deficit, while the $2 billion decrease in imports lowers the deficit. The net effect is to
reduce the deficit by $1 billion.
4. If the growth in spending is less in the U.S. than the rest of the world, what will be the
likely effect on net exports? Explain why.
Spending on imports will be likely to grow less than spending on exports and
therefore net exports will rise.
5. If inflation is lower in the United States than in countries with which the United
States trades, what will likely happen to U.S. exports, imports, and net exports?
Why?
Relatively lower prices in the United States mean that people abroad will substitute
now less expensive U.S. goods for some of their own goods. Thus, U.S. exports will
increase. Some U.S. consumers will buy more U.S. goods and fewer goods from
abroad, and thus U.S. imports will decrease. Net exports will increase.
6. If tariffs are increased, what is the likely effect on imports and exports? (Assume that
exchange rates stay constant.) Imports will fall. Because they are more costly with
the tariffs placed on the goods, consumers and businesses will reduce the amount they
spend on the goods. While there is not a direct effect on exports, it is possible that
other countries will place tariffs on U.S. goods. If that does happen, U.S. exports will
fall.
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Key Concepts
Exports
Imports
Net exports
Balance of trade
Trade deficits and surpluses
Exchange rates
Tariffs and quotas
Relevant National Economic Standards
The relevant national economic standards are:
1. Productive resources are limited. Therefore, people can not have all the goods and
services they want; as a result, they must choose some things and give up others. Students
will be able to use this knowledge to identify what they gain and what they give up when
they make choices.
5. Voluntary exchange occurs only when all participating parties expect to gain. This is
true for trade among individuals or organizations within a nation, and usually among
individuals or organizations in different nations. Students will be able to use this
knowledge to negotiate exchanges and identify the gains to themselves and others. They
will be able to compare the benefits and costs of policies that alter trade barriers
between nations, such as tariffs and quotas.
6. When individuals, regions, and nations specialize in what they can produce at the
lowest cost and then trade with others, both production and consumption increase.
Students will be able to use this knowledge to explain how they can benefit themselves
and others by developing special skills and strengths.
9. Competition among sellers lowers costs and prices and encourages producers to
produce more of what consumers are willing and able to buy. Competition among buyers
increases prices and allocates goods and services to those people who are willing and
able to pay the most for them. Students will be able to use this knowledge to explain how
changes in the level of competition in different markets can affect them.
18. A nation's overall levels of income, employment, and prices are determined by the
interaction of spending and production decisions made by all households, firms,
government agencies, and others in the economy. Students will be able to use this
knowledge to interpret media reports about current economic conditions and explain how
these conditions can influence decisions made by consumers, producers, and government
policy makers.
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19. Unemployment imposes costs on individuals and nations. Unexpected inflation
imposes costs on many people and benefits some others because it arbitrarily
redistributes purchasing power. Inflation can reduce the rate of growth of national living
standards because individuals and organizations use resources to protect themselves
against the uncertainty of future prices. Students will be able to use this knowledge to
make informed decisions by anticipating the consequences of inflation and
unemployment.
Sources of Additional Activities
Advanced Placement Economics: Macroeconomics. (National Council on
Economic Education)
UNIT SIX: The United States in a Global Economy
Economics USA: A Resource Guide for Teachers
LESSON 14: International Trade: For Whose Benefit?
LESSON 15: Exchange Rates: What in the World Is a Dollar Worth?
Handbook of Economic Lesson Plans for High School Teachers
LESSON TWENTY-SEVEN: Money Makes the World Go Around--What Is
It?
LESSON TWENTY-EIGHT: Who Needs Money? Money and Exchange
Capstone: The Nation’s High School Economics Course
UNIT FIVE: ONE. Money Isn’t Everything
UNIT SIX: FIVE. Making a Macro Model: Imports and Exports
UNIT SEVEN: ONE. Solving World Trade Mysteries: The Final Chapter,
The Future
UNIT SEVEN: THREE. Why People Trade: Comparative Advantage
UNIT SEVEN: EIGHT. Exchange Rates
UNIT SEVEN: NINE. Disagreements Over World Trade
Handbook of Economic Lesson Plans for High School Teachers
LESSON TWENTY-FIVE: The International Economy: Why Do Countries
Trade?
International Trade, Teaching Strategies
LESSON 1: To Choose or Not to Choose: That Is Not the Question
LESSON 2: Why Do People Trade?
LESSON 3: Why People and Nations Trade
LESSON 4: Trade and Specialization
LESSON 9: Trade Around the World
LESSON 10: Trade Barriers
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LESSON 15: Global Production Systems
All are available in Virtual Economics, An Interactive Center for Economic
Education (National Council on Economic Education) or directly through
the National Council on Economic Education.
Authors: Stephen Buckles
Erin Kiehna
Bharath Subramanian
Vanderbilt University
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