patterns and trends in international trade –imports are the goods and services that we buy from...

Patterns and Trends in International Trade

–Imports are the goods and services that we buy from people in other countries.–Exports are the goods and services we sell to people in other countries.


•Trade in Goods–Manufactured goods represent 50 percent of our goods exports and 70 percent of our goods imports. –Raw materials and semi-manufactured materials represent 40 percent of our exports and 15 percent of imports.–Our largest export and import items are capital goods and automobiles.–Goods account for 80 percent of our international trade. The rest is services.


•Trade in Services–International trade in services such as travel, transportation, and insurance is large and growing.

•Geographical Patterns of International Trade–Canada trades with countries all over the world, but its biggest trading partner is the United States, which buys 82 percent of our exports and sells us 71 percent of our imports. –The European Union is our second largest trading partner with 10 percent of our exports and 14 percent of our imports.


•Trends in the Volume of Trade–In 1978, we exported 25 percent of our output and imported 25 percent of the goods and services that we bought.–In 2001, we exported 43 percent of our total output and imported 38 percent of the goods and services that we bought.


•Net Exports and International Borrowing–The value of exports minus imports is called net exports. –In 2001, net exports were $57 billion. –When a country exports more than it imports, it lends to foreigners or buys some of their assets. –When a country imports more than it exports, it borrows from foreigners or sells them some of its assets.

The Gains from International Trade

–Comparative advantage is the fundamental force that generates trade between nations. –The basis for comparative trade is divergent opportunity costs between countries. –Nations can increase the consumption of goods and services when they allocate resources to the production of those goods and services for which they have a comparative advantage.

Comparative Advantage

• A nation has a comparative advantage in producing a good when it can produce it at a lower opportunity cost than its trading partner.

• Suppose two nations produce fish and milk. The one that gives up less fish per liter milk than the other has a comparative advantage in milk production.

• But then the other gives up less milk per pound of fish produced, so it has a comparative advantage in fish production.

Absolute Advantage

• A nation has an absolute advantage in producing a good when it can produce more output from the same quantity of inputs as its trading partner.

Illustration of Comparative and Absolute Advantage

Milk liters Fish pounds Milk liters Fish pounds

1 5 2 20

2 4 4 16

3 3 6 12

4 2 8 8

5 1 10 4

Trade

• Country A gives up 1 pound of fish for 1 liter of milk.

• The other gives up 2 pounds of fish for 1 liter of milk.

• The first should produce milk, the second should produce fish.

TRADE

• Note: if A gives up producing 5 fish, output goes up by 5 liters of milk. If B gives up producing 5 fish, output goes up by a little more than 2 liters of milk.

• If A and B are using the same inputs, B has an absolute advantage in both fish and milk. As a result its richer. But the best A can do is sell milk to B and buy fish.

TRADE

• A is better off to produce milk and trade with B, as long as B pays more than 1 fish per liter of milk.

• B is better off to produce fish and trade with A. They could get up to 1 liter of milk per pound of fish through trade, instead of ½ a liter through production.

• Often, prices end up nearer the opportunity cost of the big nation than the small nation.


–Figure 33.4 shows how both countries gain from trade.


•Calculating the Gains from Trade–Farmland increase its consumption of both cars and grain by decreasing car production and increasing grain production until its own opportunity cost of producing cars equals that of the world terms of trade and exchanging grain for cars at those terms of trade.–Mobilia increases its consumption of both cars and grain by increasing car production and decreasing grain production until its own opportunity cost of producing cars equals that of the world terms of trade and exchanging cars for grain at those terms of trade.


•Gains for All–Both countries gain by consuming output combinations outside their respective production possibilities frontier.–Farmers selling grain and Mobilians selling cars face increased demand and higher prices.–Farmers buying cars and Mobilians buying grain face increased supply and lower prices.


•Gains from Trade in Reality–Gains from trade occur in the real global economy.–Canada buys TVs and VCRs from Korea, machinery from Europe, and fashion goods from Hong Kong in exchange for machinery, grain, lumber, airplanes, computers, and financial services..–The combination of diverse preferences and economies of scale create comparative advantages that generate a large volume of international trade in similar but differentiated products.

patterns and trends in international trade –imports are the goods and services that we buy from...

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