I'Overview of international trade

1
Rose-Hulman Institute of Technology Department of
Humanities Social Sciences / K. Christ SL 151,
Principles of Economics
Student Notes 14 International Trade Exchange
Part I

• I. Overview of international trade
• Pattern of trade
• Balance of payments
• Motivation for trade Ricardian trade
• Comparative advantage
• Terms of trade
• III. International balances, exchange rates, and
  adjustment
• IV. The political economy of international trade
  part 1
• Justifications of protectionism
• Traditional welfare analysis of trade
  restrictions
• V. The political economy of international trade
  part 2
• Historical perspectives and international
  institutions
• The anti-globalization backlash

2
International Trade and Exchange Overview of
U.S. Trade
The Increasing Importance of Foreign Trade in the
U.S. Economy
3
International Trade and Exchange Overview of
U.S. Trade
U.S. Balance of Payments, 2003 (Millions of
Dollars)
Source U.S. Bureau of Economic Analysis,
http//www.bea.doc.gov
4
International Trade and Exchange Overview of
U.S. Trade
U.S. Key Trading Partners, 2003 Exports and
Imports by Area, Millions of Dollars (with Key
Countries)
Source U.S. International Trade Association,
http//www.ita.doc.gov
5
International Trade and Exchange Overview of
U.S. Trade
Top U.S. Exports and Imports By Category,
2003 Millions of Dollars
6
International Trade and Exchange Overview of
U.S. Trade
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A Little Aggregate Income Accounting
Y C I G X
Y C G I X
F
The economy exports its excess savings to
the rest of the world. NFI gt 0
S I X
F
The economy imports excess savings from the
rest of the world. NFI lt 0
8
International Trade and Exchange Basic Trade
Theory
Comparative Advantage and the Gains from Trade
Story

• Comparative advantage means having a lower
  opportunity cost in terms of other potential
  products.
• Specialization generates potential gains from
  trade that can make both trading partners better
  off.
• Every country will have a comparative advantage
  in something.

9
International Trade and Exchange Basic Trade
Theory
An Illustration of Comparative Advantage and
Gains from Trade
Technology and Opportunity Cost
Production Requirements
Opportunity Cost
Camera
Computer
1 Camera
1 Computer
Germany United States
8 hours 10 hours
160 hours 100 hours
1/20 computer 1/10 computer
20 cameras 10 cameras
Without Specialization and Trade
Maximum Production
Diversified Production
Cameras
Computers
Cameras
Computers
or or
Germany United States
25,000 20,000
1,250 2,000
12,500 10,000
625 1,000
and and
Assuming countries have 200,000 available hours
and split their time evenly between cameras and
computers.
10
International Trade and Exchange Basic Trade
Theory
An Illustration of Comparative Advantage and
Gains from Trade
United States
Germany
Computers
Computers
2,000
1,250
1,000
625
Cameras
Cameras
10,000
20,000
12,500
25,000
U.S. opportunity cost 1 computer 10 cameras
German opportunity cost 1 computer 20 cameras
11
International Trade and Exchange Basic Trade
Theory
An Illustration of Comparative Advantage and
Gains from Trade
Technology and Opportunity Cost
Production Requirements
Opportunity Cost
Camera
Computer
1 Camera
1 Computer
Germany United States
8 hours 10 hours
160 hours 100 hours
1/20 computer 1/10 computer
20 cameras 10 cameras
Without Specialization and Trade
Maximum Production
Diversified Production
Cameras
Computers
Cameras
Computers
or or
Germany United States
25,000 20,000
1,250 2,000
12,500 10,000
625 1,000
and and
Assuming countries have 200,000 available hours
and split their time evenly between cameras and
computers.
12
International Trade and Exchange Basic Trade
Theory
An Illustration of Comparative Advantage and
Gains from Trade
Technology and Opportunity Cost
Production Requirements
Opportunity Cost
Camera
Computer
1 Camera
1 Computer
Germany United States
8 hours 10 hours
160 hours 100 hours
1/20 computer 1/10 computer
20 cameras 10 cameras
Without Specialization and Trade
Maximum Production
Diversified Production
Cameras
Computers
Cameras
Computers
or or
Germany United States
25,000 20,000
1,250 2,000
12,500 10,000
625 1,000
and and
Assuming countries have 200,000 available hours
and split their time evenly between cameras and
computers.
With Specialization and Trade
Specialized Production
Consumption
Cameras
Computers
Cameras
Computers
Germany United States
25,000 --
-- 2,000
15,000 10,000
1,000 1,000
and and
Assuming that Germany specializes in cameras,
and the U.S. specializes in computers, and they
trade 10,000 cameras for 1,000 computers
(Trading price 10 cameras 1 computer).
13
International Trade and Exchange Basic Trade
Theory
An Illustration of Comparative Advantage and
Gains from Trade
United States
Germany
Computers
Computers
2,000
1,250
1,000
625
Cameras
Cameras
10,000
20,000
12,500
25,000
U.S. opportunity cost 1 computer 10 cameras
German opportunity cost 1 computer 20 cameras
14
International Trade and Exchange Basic Trade
Theory
The Terms of Trade and the International
Distribution of Gains from Trade
Germanys Opportunity Cost 20 Cameras 1
Computer
15 Cameras 1 Computer
United States Opportunity Cost 10 Cameras 1
Computer
If trade occurs on these terms, all the gains
from trade flow to the U.S.
If trade occurs on these terms, gains from
trade accrue to both countries
If trade occurs on these terms, all the gains
from trade flow to Germany
15
International Trade and Exchange Basic Trade
Theory
An Illustration of Comparative Advantage and
Gains from Trade
Technology and Opportunity Cost
Production Requirements
Opportunity Cost
Camera
Computer
1 Camera
1 Computer
Germany United States
8 hours 10 hours
160 hours 100 hours
1/20 computer 1/10 computer
20 cameras 10 cameras
Without Specialization and Trade
Maximum Production
Diversified Production
Cameras
Computers
Cameras
Computers
or or
Germany United States
25,000 20,000
1,250 2,000
12,500 10,000
625 1,000
and and
Assuming countries have 200,000 available hours
and split their time evenly between cameras and
computers.
With Specialization and Trade
Specialized Production
Consumption
Cameras
Computers
Cameras
Computers
Germany United States
25,000 --
-- 2,000
13,750 11,250
750 1,250
and and
Assuming that Germany specializes in cameras,
and the U.S. specializes in computers, and they
trade 11,250 cameras for 750 computers (Trading
price 15 cameras 1 computer).
16
International Trade and Exchange Basic Trade
Theory
An Illustration of Comparative Advantage and
Gains from Trade
Technology and Opportunity Cost
Production Requirements
Opportunity Cost
Camera
Computer
1 Camera
1 Computer
Germany United States
80 100
1,600 1,000
1/20 computer 1/10 computer
20 cameras 10 cameras
Without Specialization and Trade
Maximum Production
Diversified Production
Cameras
Computers
Cameras
Computers
or or
Germany United States
25,000 20,000
1,250 2,000
12,500 10,000
625 1,000
and and
Assuming countries have 200,000 available hours
and split their time evenly between cameras and
computers.
With Specialization and Trade
Specialized Production
Consumption
Cameras
Computers
Cameras
Computers
Germany United States
25,000 --
-- 2,000
13,750 11,250
750 1,250
and and
Assuming that Germany specializes in cameras,
and the U.S. specializes in computers, and they
trade 11,250 cameras for 750 computers (Trading
price 15 cameras 1 computer).
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International Trade and Exchange Basic Trade
Theory
The Exchange Rate and Terms of Trade
Germanys Opportunity Cost 20 Cameras 1
Computer
15 Cameras 1 Computer
United States Opportunity Cost 10 Cameras 1
Computer
If trade occurs on these terms, all the gains
from trade flow to the U.S.
If trade occurs on these terms, gains from
trade accrue to both countries
If trade occurs on these terms, all the gains
from trade flow to Germany
15 cameras _at_ 80 each 1,200
1 computer _at_ 1,000 each 1,000
10 cameras _at_ 80 each 800
1 computer _at_ 1,000 each 1,000
20 cameras _at_ 80 each 1,600
1 computer _at_ 1,000 each 1,000
/ 0.833
/ 1.250
/ 0.625
Dollar appreciation (Euro depreciation)
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International Trade and Exchange Basic Trade
Theory
The Exchange Rate and Terms of Trade
Boldface denotes low opportunity cost for the
good (comparative advantage), and thus
identifies the good as an export good for that
country.
Computation of U.S. Terms of Trade (Using /
0.833 as a base.)

/1.250



/0.833


/0.625
F
As the dollar appreciates (from /1.250 to
/0.625), U.S. terms of trade improve.
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International Trade and Exchange Basic Trade
Theory
U.S. Terms of Trade, 1984 to Present
Source BEA and USITC. http//www.bls.gov/web/ximp
im.supp.toc.htm
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Currency movements and the trade balance
Currency Appreciation An increase in the value
of a currency as measured by the amount of
foreign currency it can buy.
Currency Depreciation A decrease in the value of
a currency as measured by the amount of foreign
currency it can buy.
Domestic goods become more expensive for
foreigners.
Foreign goods become less expensive for domestic
buyers.
Domestic goods become less expensive for
foreigners.
Foreign goods become more expensive for domestic
buyers.
Exports tend to fall.
Imports tend to rise.
Exports tend to rise.
Imports tend to fall.
Tendency toward Current Account Deficit
Tendency toward Current Account Surplus
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U.S. Exchange Rates
22
U.S. Exchange Rates
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U.S. Exchange Rates
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U.S. Exchange Rates
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