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 ____ ____ ____ ____ ____ ____ ____

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 ––––– –––

European Union Canada Japan Mexico China Partner % Exports % Imports 2013 Source: 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: Canada 8 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 Butter Bonsai Guns Butter

Production Possibilities - Mexico ProductABCDE Avocados Soybeans Production Possibilities - US ProductABCDE Avocados Soybeans S = __ A 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 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 StatesJapan Food (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 US 1 in the U.S. and J 1 in Japan. Clothing (million units) M N US 1 J1J1 Each of these points lay along the production possibilities curve (PPC) of the respective nation. S R

United StatesJapan 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) Consumption possibilities of U.S. with trade M US 1 N O J1J1 R 400 T Consumption possibilities of Japan with trade S

United States M Japan S US 1 J1J1 N Food (million units) R Consumption Possibilities with Trade Food (million units) For example, with specialization and trade, the U.S. could increase its consumption from US 1 to US 2, gaining 50 million units of clothing and 100 million units of food. Simultaneously, Japan could increase consumption from J 1 to J 2, a gain of 125 million units of food and 25 million units of clothing Clothing (million units) 400 O T J2J US 2

United States M Japan S N Food (million units) R Consumption Possibilities with Trade Food (million units) How exactly do the U.S. and Japan consume at US 2 and J 2 ? The U.S. produces 400 million units of food, consumes 200 million, and exports 200 million to Japan Clothing (million units) 400 O T J2J US 2 US imports Japan imports US 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

Imports 1985% 2010% Foods, feeds, beverages Non-Food consumer goods Automotive Capital goods Industrial supplies

Some U.S. ExportsQuantity 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 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.

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

PnPn PwPw QnQn QcQc QpQp a b PwPw QwQw 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 P n. Free trade permits U.S. soybean producers to sell Q p units at the higher world price of P w. SwSw SdSd DdDd c SwSw DwDw

PnPn DdDd PwPw QnQn QcQc QpQp a b c SdSd PwPw QwQw Soybeans (bushels) Price SwSw DwDw SwSw Soybeans (bushels) Price U.S. Market World Market U.S. Has a Comparative Advantage At the world price of P w, the quantity (Q p – Q c ) is exported. Compared to the no-trade situation, the producers’ gain from the higher price (P w b c P n ) exceeds the cost imposed on domestic consumers (P w a c P n ) by the triangle (area) a b c. U.S. exports

PnPn QnQn PwPw QwQw Shoes Price SwSw DwDw Shoes 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 P n. Since many foreign producers have a comparative advantage in the production of shoes, international trade leads to lower prices P w. SdSd DdDd a

DdDd QnQn a SdSd PwPw QwQw Shoes Price SwSw DwDw Shoes Price U.S. Market World Market At the price P w, U.S. consumers demand Q c units of which (Q c – Q p ) are imported. Compared to no trade, consumers gain P n a b P w, while domestic producers lose P n a c P w. A net gain of a b c results. PwPw b c PnPn QpQp QcQc U.S. imports SwSw 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– 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 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.