Introduction to International

Economics
Exports as % of GDP
40
35
30
25
20
15
10

China

World

5
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Trade in Goods and Services

Relative to GDP

2008 Worth Publishers

International Economics
Feenstra/Taylor

Map of World Trade

Figure 1.2 World Trade in Goods, 2000 ($ billions)

2008 Worth Publishers

International Economics
Feenstra/Taylor

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.
2008 Worth Publishers
International Economics
Feenstra/Taylor

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.
2008 Worth Publishers
International Economics
Feenstra/Taylor

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
2008 Worth Publishers

large.
International Economics
Feenstra/Taylor

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

Chinas labor is cheap (at current exchange rates).
Japan can produce high quality goods efficiently.

2008 Worth Publishers

International Economics
Feenstra/Taylor

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.
2008 Worth Publishers
International Economics
Feenstra/Taylor

Map of World Trade

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

2008 Worth Publishers

International Economics
Feenstra/Taylor

Openness - rough measure of the importance

of international trade
(Exports + Imports)
Openness =
GDP

Trade
Compared
to
GDP
Table 1.2 Trade/GDP Ratio in 2005

2008 Worth Publishers

International Economics
Feenstra/Taylor

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.

Copyright 2006 Pearson

Addison-Wesley. All rights
reserved.

1-12

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.

Copyright 2006 Pearson

Addison-Wesley. All rights
reserved.

1-13

Gains from Trade (cont.)

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
Copyright 2006 Pearson
Addison-Wesley. All rights
reserved.

1-14

Gains from Trade (cont.)

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

1-15

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

2008 Worth Publishers

International Economics
Feenstra/Taylor

Barriers to Trade
Figure 1.4 Average Worldwide Tariffs, 18602000

2008 Worth Publishers

International Economics
Feenstra/Taylor

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