Introduction to International Trade

International Trade Exports—goods and services produced in one country and sold to other countries. Imports—goods and services consumed in a country but which have been purchased from other countries. Trade Deficit (Surplus)—a country has a trade deficit (surplus) if its imports (exports) exceeds its exports (imports).

Index of Openness Index of Openness—a measure of how much a country participates in international trade; defined as the ratio of a country’s exports to its GDP (or GNP). Open Economy—a country with a high value of the index of openness. Closed Economy—a country with a relatively low index of openness.

Causes of Differences in Economic Growth of Countries Quantity and quality of resource endowments, particularly human capital Investment in plant and equipment (capital) Political and socioeconomic environment that is stable and conducive to competition

Growth of World Exports What has caused the explosion of world trade? Reduction in trade barriers Advances in transportation, communication and technology Proliferation of trade agreements

FIGURE 1.1 World Exports and Output in Real Terms: 1950–2007

Geographic Trade Patterns Developed countries account for the bulk of world trade (largest exporters and importers). Developed countries trade primarily with each other. Developing countries rely on developed countries for their export markets. Countries trade mainly with neighbors.

TABLE 1.2 Top Ten Trading Partners of Selected Countries, 2007

Commodity Composition Top three most traded products Petroleum Office machines, computers, and parts Automobiles Increased role of global production (or outsourcing)

World Trade in Major Products: 1994, 1999, 2003, 2006 (Rank, value in billions of $, percent share)

GLOBALIZATION Globalization is the term used to convey the idea that international factors are becoming a more important part of the world economy The simplest measure of globalization is the ratio of exports to GDP Countries with a high ratio of exports to GDP are generally more open to the world economy than countries with a low ratio

Real Export plus Imports as a Percent of GDP GLOBALIZATION Table 1.6 Exports Plus Imports as a Percentage of GDP for Selected Countries Country Real Export plus Imports as a Percent of GDP Singapore 462.9% Hong Kong 334.4 Luxembourg 282.0 Hungary 180.0 Ireland 176.7 Belgium 174.0 Netherlands 146.9 Taiwan 118.1 Honduras 109.7 Philippines 107.7 Austria 103.0 Costa Rica 96.4 Korea 95.5

Real Export plus Imports as a Percent of GDP GLOBALIZATION Table 1.6 Exports Plus Imports as a Percentage of GDP for Selected Countries Country Real Export plus Imports as a Percent of GDP Denmark 94.5 Switzerland 90.7 Sweden 88.9 Canada 81.8 Indonesia 81.7 Portugal 79.9 Nicaragua 79.3 Iceland 78.9 Israel 78.3 Finland 77.9 Ecuador 76.9 Germany 76.6 Norway 76.4

Real Export plus Imports as a Percent of GDP GLOBALIZATION Table 1.6 Exports Plus Imports as a Percentage of GDP for Selected Countries Country Real Export plus Imports as a Percent of GDP Turkey 71.2 Chile 71.1 Poland 69.5 Mexico 66.8 Spain 65.1 U.K. 59.9 France 57.5 Italy 54.5 China 54.4 South Africa Greece 54.3 Australia 48.9 U.S. 26.6 Japan 23.4

GLOBALIZATION Figure 1.4 Real World Exports of Goods as a Percentage of Real World GDP 25% – 20% – 15% – 10% – 5% – 0% – 1975 1980 1985 1990 1995 2000 2005 Exports as a Percent of GDP

GLOBALIZATION Globalization or the increasing openness of an economy, means changes that are not universally positive Globalization involves not only the goods and service but the movement of people and money as well International transactions occur because both parties expect the transaction to improve their welfare