Ch. 37: International Trade 1 Graphs and Tables Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

U.S. trade deficit in goods – $517 billion in 2009 U.S. trade surplus in services – $138 billion in 2009 Canada largest U.S. trade partner Trade deficit with China – $220 billion in 2009 Exports are 13% U.S. output LO Key Trade Facts 2

Principal U.S. exports include: – Chemicals – Agricultural products – Consumer durables – Semiconductors – Aircraft U.S. provides about 8.5% of world’s exports LO Key Trade Facts 3

Principal U.S. imports include: – Petroleum (trade deficit to OPEC members) – Automobiles – Metals – Household appliances – Computers LO Key Trade Facts 4

LO Key Trade Facts

Why do nations trade? The distribution of resources among nations is uneven – nations differ in resource endowments. – Labor-, land-, and capital-intensive goods Efficient production (low opportunity cost) requires different technologies. Goods have different qualities. 6

Main Trade Result Specialization and international trade increase the productivity of U.S. resources and allow the U.S. to obtain greater total output than would otherwise be possible. 7

Production Possibilities: U.S. and Mexico 8

Specializing based on Comparative Advantage Absolute advantage is irrelevant to trade. U.S. has the lowest opportunity cost of producing 1 unit of beef (1V for U.S. vs. 2V for Mexico) Mexico has the lowest opportunity cost of producing 1 unit of vegetables (1B for U.S. vs. ½B for Mexico) If countries don’t specialize, there would be an inefficient use of resources. 9

Comparative Advantage Example: Summary 10

Trading Possibilities & Gains from Trade 11

Trade with increasing costs – Concave production curve – Resources not perfectly substitutable – Incomplete specialization Case for free trade – Promote efficiency: production at lower opportunity costs – Promote competition: more producers LO Comparative Advantage: Final details 12

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