Introduction to International Economicshallagan/EconS327/weeks/week1/...International Economics...

Introduction to International Economics

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Exports as % of GDP

China World

© 2008 Worth Publishers ▪International Economics ▪Feenstra/Taylor

Trade in Goods and Services

Relative to GDP


Map of World TradeFigure 1.2 World Trade in Goods, 2000 ($ billions)


Map of World Trade

• European and U.S. Trade

– Europe and the U.S. together account for 35% of world trade flows.

– Differences among these countries explain some of the trade between them.

– Despite this, industrialized countries like the U.K. and U.S. have many similarities.

– We will examine why “similar” countries trade so much.


Map of World Trade

• European and U.S. Trade

– Trade within Europe is the largest, about 28% of world trade.

• Many countries

• Easy to ship between countries because import tariffs are low

• European Union (EU) countries have zero tariffs on imports from each other.

• EU has 25 members with two more joining in 2007.


Map of World Trade

• Trade in the Americas

– Trade between North, Central, and South America and the Caribbean totals 13% of all world trade.

– Most of this is within the North American Free Trade Area which consists of Canada, the U.S. and Mexico.

– Unlike the EU, it is unlikely that NAFTA will gain new countries any time soon.

• Trade between the NAFTA countries and Central and South America is relatively small and the distances are large.


Map of World Trade

• Trade with Asia

– All exports from Asia total 28% of all world trade.

• Exports from China alone doubled from 2000 to 2005.

– Many reasons why Asia trades so much

• China’s labor is cheap (at current exchange rates).

• Japan can produce high quality goods efficiently.


Map of World Trade

• Other Regions

– Oil and natural gas are exported from the Middle East and Russia.

• Exports from these two areas totaled another 10% of world trade.

– Africa accounts for only 2.5% of world trade.

• Very small given its size and population

• Many believe getting Africa out of poverty will require better linkages with the world through trade.


Map of World TradeTable 1.1: Shares of World Trade, Accounted for by Selected Regions, 2000

Openness - rough measure of the importance

of international trade

(Exports + Imports)

GDPOpenness =


Trade Compared to GDPTable 1.2 Trade/GDP Ratio in 2005

Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

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Gains from Trade

• Several ideas underlie the gains from trade

1. When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off.• Norwegian consumers could buy oranges through international

trade that they otherwise would have a difficult time producing.

• The producer of the oranges receives income that it can use to buy the things that it desires.


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Gains from Trade (cont.)

2. How could a country that is the most (least) efficient producer of everything gain from trade?

– With a finite amount of resources, countries can use those resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume.

– Countries can specialize in production, while consuming many goods and services through trade.


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3. Trade is predicted to benefit a country by making it more efficient when it exports goods which use abundant resources and imports goods which use scarce resources.

4. When countries specialize, they may also be more efficient due to large scale production.

5. Countries may also gain by trading current resources for future resources (lending and borrowing)..

6. Trade offers consumers a wider variety of goods.

7. Trade increases competition and this can affect efficiency and the rate of technological change


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• Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country.

– International trade can adversely affect the owners of resources that are used intensively in industries that compete with imports.

– Trade may therefore have effects on the distribution of income within a country.

– Conflicts about trade should occur between groups within countries rather than between countries.


Barriers to TradeFigure 1.3 Trade in Goods and Services Relative to GDP


Barriers to TradeFigure 1.4 Average Worldwide Tariffs, 1860–2000

Labor and Capital Greater interdependence typically leads to

more movement of the factors of production

between nations.

o mobility of labor into the U.S. declined

from the 1920s to the 1960s due to more

stringent immigration policies

o capital flows have increased substantially

as other nations invested in U.S. assets

International Trade Versus International Finance

• International trade focuses on transactions of real goods and services across nations.

– These transactions usually involve a physical movement of goods or a commitment of tangible resources like labor services.

• International finance focuses on financial or monetary transactions across nations.

– For example, purchases of US dollars or financial assets by Europeans.

U.S. Balance of Payments: 1980-2008

o trade deficits can decrease value of dollar decreasing U.S. purchasing power abroad

o trade deficits can also decrease employment in domestic industries but are offset by capital inflows generating employment in other industries

U.S. as Debtor Nation

net debtor – foreign claims on U.S. exceed U.S. claims on foreigners

Introduction to International Economicshallagan/EconS327/weeks/week1/...International Economics...

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