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Ch. 37: International Trade

Graphs and Tables Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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• U.S. trade deficit in goods –$517 billion in 2009

• U.S. trade surplus in services –$138 billion in 2009

• Canada largest U.S. trade partner• Trade deficit with China–$220 billion in 2009

• Exports are 13% U.S. outputLO1 37-2

Key Trade Facts

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• Principal U.S. exports include:–Chemicals–Agricultural products–Consumer durables–Semiconductors–Aircraft

• U.S. provides about 8.5% of world’s exports

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Key Trade Facts

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• Principal U.S. imports include:–Petroleum (trade deficit to OPEC

members)–Automobiles–Metals–Household appliances–Computers

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Key Trade Facts

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Key Trade Facts

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Why do nations trade?

• The distribution of resources among nations is uneven – nations differ in resource endowments.– Labor-, land-, and capital-intensive goods

• Efficient production (low opportunity cost) requires different technologies.

• Goods have different qualities.

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Main Trade Result

• Specialization and international trade increase the productivity of U.S. resources and allow the U.S. to obtain greater total output than would otherwise be possible.

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Production Possibilities:U.S. and Mexico

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Specializing based on Comparative Advantage

• Absolute advantage is irrelevant to trade.• U.S. has the lowest opportunity cost of

producing 1 unit of beef (1V for U.S. vs. 2V for Mexico)

• Mexico has the lowest opportunity cost of producing 1 unit of vegetables (1B for U.S. vs. ½B for Mexico)

• If countries don’t specialize, there would be an inefficient use of resources.

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Comparative Advantage Example: Summary

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Trading Possibilities & Gains from Trade

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• Trade with increasing costs–Concave production curve–Resources not perfectly substitutable –Incomplete specialization

• Case for free trade–Promote efficiency: production at

lower opportunity costs–Promote competition: more

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Comparative Advantage: Final details

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