CHAPTER 1:

The World of International Economics

McGraw-Hill/Irwin 1-1 1-1

Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.
 Introduction
 International trade and finance
have never been more important.
 Signs of globalization are
everywhere.

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International Trade: Questions
 We’ll explore these questions:
• What are the effects of trade?
• What determines the basis of trade?
• What determines the value and
volume of trade?
• What factors impede the flow of
trade?
• What happens when policies impede
the flow of trade?
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The Nature of Merchandise
Trade
 The volume and value of world
exports have grown tremendously.
 The value of global exports was
$17.8 trillion in 2011; it was $2
trillion in 1985.
 Over the past 40 years, global
trade has grown faster than global
production.
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 Growth in World Goods Production and Trade, 1963-2010 (average annual
percentage change in volume)

1963-73 1970-79 1980-1985 1985-90 1995-2000 2005-10

Production
All commodities 6.0% 4.0% 1.7% 3.0% 4.0% 2.0%
Agriculture 2.5 2.0 2.9 1.9 2.5 2.0
Mining 5.5 2.5 -2.7 3.0 2.0 0.5
Manufacturing 7.5 4.5 2.3 3.2 4.0 2.5
Exports
All commodities 9.0% 5.0% 2.1% 5.8% 7.0% 3.5%
Agriculture 14.0 4.5 1.0 2.2 3.5 3.5
Mining 7.5 1.5 -2.7 4.8 4.0 1.5
Manufacturing 11.5 7.0 4.5 7.0 8.0 4.0

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Geographical Composition
of Trade
 North America, Europe, and Asia
dominate global exporting and
importing.
 These regions tend to trade with
other countries in the same
region.

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 Merchandise Exports and Imports by Region, 2011 (billions of dollars)

Value of Exports Share Value of Imports Share

North America $2,283 12.8% 3,090 17.2%

South and Central America 749 4.2 727 4.0
Europe 6,601 37.1 6,854 38.1
Commonwealth of Indep. States 788 4.4 540 3.0
Africa 597 3.4 555 3.1
Middle East 1,228 6.9 665 3.7
Asia 5,534 31.1 5,568 30.9

World $17,779 100.0% $18,000 100.0%

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 Regional Structure of Exports, 2010
North South and Europe CIS Africa Middle Asia
America Central East
America

N. America 48.7% 8.4% 16.8% 0.6% 1.7% 2.7% 21.0%

So. And C. America 23.9% 25.6% 18.7% 1.3% 2.6% 2.6% 23.2%
Europe 7.4% 1.7% 71.0% 3.2% 3.1% 3.0% 9.3%
CIS 5.6% 1.1% 52.4% 18.6% 1.5% 3.3% 14.9%
Africa 16.8% 2.7% 36.2% 0.4% 12.3% 3.7% 24.1%
Middle East 8.8% 0.8% 12.1% 0.5% 3.2% 10.0% 52.6%
Asia 17.1% 3.2% 17.2% 1.8% 2.7% 4.2% 52.6%

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Top 10 Merchandise Exporters, 2011

Value Percentage
Country $, billions Share

China $1,889 10.4%

United States 1,481 8.1
Germany 1,474 8.1
Japan 823 4.5
Netherlands 660 3.6
France 597 3.3
Korea 555 3.0
Italy 523 2.9
Russian Federation 522 2.9
Belgium 476 2.6

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Top 10 Merchandise Importers, 2011

Value Percentage
Country $, billions Share

United States $2,265 12.3%

China 1,743 9.5
Germany 1,254 6.8
Japan 854 4.6
France 715 3.9
United Kingdom 636 3.5
Netherlands 597 3.2
Italy 557 3.0
Korea 524 2.9
Hong Kong (China) 511 2.8

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Commodity Composition of
Trade
 In 2010, manufactures comprised
67.1% of trade, with agricultural
and mining-related products
making up the balance.

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 Composition of World Merchandise Exports
($, billions), 2010 and 1980

Product Category Value in Share in Share in

2010 2010 1980
Agricultural Products $1,362 9.2% 14.7%
Mining Products $3,026 20.4% 27.7%
Manufactures $9,962 67.1% 53.9%

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 Trade and the U.S.
 The U.S. trades the most with our
NAFTA partners (Canada and
Mexico), followed by the European
Union.
 Trade with Asia is also very
important. China is the second
largest trading partner of the
United States.
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 U.S. Merchandise Trade by Area and Country, 2011
(millions of dollars and %)
Exports to Imports From
value share value share
Region or Country
European Union $273,280 18.3% $373,216 16.7%
Europe, non-EU 62,307 4.2% 80,387 3.6%
Canada 282,253 18.8% 321,955 14.4%
Mexico 197,777 13.2% 267,572 12.0%
Latin America (not 169,639 11.3% 174,556 7.8%
Mexico)
China 105,180 7.0% 400,529 17.9%
Japan 67,654 4.5% 131,666 5.9%
Other Asia 246,069 16.4% 285,756 12.8%
Middle East 59,497 4.0% 106,699 4.8%
Africa 33,733 2.3% 93,345 4.2%
Total 1,497,389 100.0% 2,235,681 100.0%

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Commodity Composition of
U.S. Trade
 The U.S. tends to export capital
goods and industrial supplies.
 The U.S. tends to import
consumer goods and petroleum.

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 Commodity Composition of U.S. Trade, 2011
(billions of dollars and %)
Exports to Imports From
value share value share

Foods, feeds, beverages $126.1 8.4% $108.2 4.8%

Industrial supplies/materials 517.7 34.6% 783.8 35.0%
Capital goods (non-auto) 491.4 32.8% 513.3 23.0%
Automotive 132.5 8.8% 255.0 11.4%
Consumer goods 176.3 11.8% 516.8 23.1%
Other goods 53.3 3.6% 59.3 2.7%
Total 1,497.4 100.0% 2,235.7 100.0%

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 Trade in Services
 Over $4 trillion annually (2010).
 About 20% of total trade (closer to
30% for U.S.).

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 Leading Exporters of
Commercial Services, 2010
Country Value Share
(billions of $)
U.S. $578 13.9%
United Kingdom 274 6.6%
Germany 253 6.1%
China 182 4.4%
France 161 3.9%
India 148 3.9%
Japan 143 3.4%
Spain 141 3.4%
Netherlands 128 3.1%
Singapore 125 3.0%

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 Leading Importers of
Commercial Services, 2010
Country Value (billions Share
of $)
U.S. $391 10.1%
Germany 284 7.3%
China 236 6.1%
United Kingdom 171 4.4%
Japan 165 4.3%
France 141 3.6%
India 130 3.4%
Netherlands 118 3.1%
Italy 115 3.0%
Ireland 113 2.9%

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 The Changing Degree on
Economic Interdependence
 The relative importance of trade
has grown for most countries.
 The relative importance of trade
for all countries together has also
grown.

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International Interdependence for Selected Countries and Groups of
Countries, 1970 – 2010 (exports as a % of GDP)
1970 2010
Industrialized Countries:
Australia 14% 20%
Belgium 52% 80%
Canada 23% 29%
France 16% 25%
Germany NA 47%
Italy 16% 27%
Japan 11% 15%
Netherlands 42% 78%
United Kingdom 23% 30%
United States 6% 13%
Developing Countries:
Argentina 9% 22%
Chile 15% 39%
China 3% 30%
Czech Republic NA 79%
India 4% 22%
Kenya 30% 26%
Mexico 6% 30%
Nigeria 8% 39%

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