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.
 Patterns and Trends in
International Trade
•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.
 Patterns and Trends in
International Trade
•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.
 Patterns and Trends in
International Trade
•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.
 Patterns and Trends in
International Trade
•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.
 The Gains from International
Trade
–Figure 33.4 shows how both countries gain from trade.
 The Gains from International
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.
 The Gains from International
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.
 The Gains from International
Trade
•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.