International Trade

An Introduction

International economics as a field of study in economics; one may ask:

What makes economic relations among nation states different from economic relations within a nation state?

Possible answers: Each country identifies itself by a geographical area

over which it claims sovereignty.

Each country has its own government and its own sets of rules and regulations. The political systems of most nation states are different.

Activities or transactions leading to movements of people, factors of production (i.e., labor, capital and raw materials), manufactured goods and services across a county's borders are often controlled or restricted and in some cases are prohibited.

Most nation states have their own monies (currencies) and banking systems.

Despite the basic commonalties among all human beings, people of different countries tend to have different cultures, speak different languages, and have different tastes and habits.

==>All of the above have restricting effects on economic interactions among nation states.

Increasing International Interdependence

• Since the end of World War II the world's international trade and investment have been growing steadily.

• Better and less expensive transportation, lower trade barriers, the establishment of international institutions and organizations including trade organizations, reduced levels of international tension, regional economic agreements, and international trade agreements have all contributed to the growth in the in international trade and investment.

• Economic events in one country could have significant implications in other countries.

More recent developments:

• Trade liberalization ( the establishment of WTO)

• Capital market liberalization

• Economic integrations

European Union

NAFTA

ASEAN

• Emergence of China as an economic force

• Globalization developments

International Economic Relations

• Trade• International Factor Movements

• Investment

• Unilateral transfers of goods and services and

factors of production

• Official transactions

International Financial Transactions

• Trade-based transactions

• Investment transactions

• Unilateral transactions

• Official transactions

• Speculative transactions

• Hedging transactions

• Trading in derivatives

International Financial Institutions

• Markets and exchanges in international financial centers such as London, New York, Paris, Tokyo, Singapore, etc.

• International banks and brokerage firms

• Central banks

• The IMF

• The World Bank

Studying International Economics

• Microeconomics: International Trade and Factor Mobility

• Macroeconomics: International Finance (Balance of Payments, Exchange Rate, and International Monetary System)

• Positive and Normative Analysis

The United States and the World <<Economic Interdependence>>

• From the production possibilities curve analysis we have learned that an economy's output cannot grow beyond its production possibilities unless there is a an increase in its economic resources or/and there is an improvement in its technology.

• Trading with other countries allows a country's consumers to consume outside its production possibility area; that means the country can achieve a consumption level not achievable without trade.

The U.S. and International Trade

• The United States has the largest amount of international trade in the world. In recent years the U.S. has imported an amount equal to about 15 percent of its GDP annually.

• Since 1980, the value of the U.S. annual imports has (consistently) been greater than the value of its annual exports resulting in balance of trade deficits.

GDP Exports Imports BOT %Exprts %Imprts %BOT1960 527.00 25.30 22.80 2.50 4.80 4.33 0.471965 720.00 35.40 31.50 3.90 4.92 4.38 0.541970 1040.00 57.00 55.80 1.20 5.48 5.37 0.121975 1635.00 136.30 122.70 13.60 8.34 7.50 0.831980 2796.00 278.90 293.80 -14.90 9.97 10.51 -0.531985 4213.00 303.00 417.20 -114.20 7.19 9.90 -2.711990 5803.00 557.20 628.60 -71.40 9.60 10.83 -1.231995 7400.00 818.60 902.80 -84.20 11.06 12.20 -1.142000 9825.00 1131.00 1520.30 -389.30 11.51 15.47 -3.962002 10446.00 974.72 1395.79 -421.07 9.33 13.36 -4.032003 10960.80 1016.10 1511.00 -494.90 9.27 13.79 -4.522004 11712.50 1151.94 1763.24 -611.30 9.84 15.05 -5.222005 12455.80 1275.24 1991.97 -716.73 10.24 15.99 -5.75

US Trade 1960 –2005- ($Billions)

US Exports and Imports as % of GDP 1960-2005

0.00

5.00

10.00

15.00

20.00

%Exprts %Imprts

US Trade Deficit, 2005 - Top Ten Countries ($Billion)World 716.73 % of TotalChina 201.63 28.13Canada 76.45 10.67Japan 82.68 11.54Germany 50.66 7.07Mexico 50.15 7.00Venezuela 27.56 3.85Nigeria 22.57 3.15Malaysia 23.25 3.24Saudi Arabia 20.40 2.85Irland 19.29 2.69

US Financial Link to the Rest of the World

International CapitalFlow

$MillionSelected US invest. Foreign US GDP

Years Abroad Invst. in US US Inv Ab F Inv In US1960 4,099 2,294 526,600 0.78 0.441970 9,337 6,359 1,035,600 0.90 0.611980 86,967 62,612 2,784,200 3.12 2.251990 74,011 74,160 5,743,800 1.29 1.291997 478,502 477,666 8,111,000 5.90 5.89

US Investment Abroad and Foreign

Investment in US as % of GDP

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

US Inv Ab

F Inv In US

-3,000,000

-2,500,000

-2,000,000

-1,500,000

-1,000,000

-500,000

0

500,000

1,000,000

US Net International Investment Position 1980-2005 ($Million)

The World Trade Distribution(2005)

Countries/Regions Exports % of Wld Imports- % of Wld %of GDPWorld ($Million) 12,812,654.00 12,964,062.00 48.00

High Inc 72.6% 73.9% 45.00 Middle Inc 24.6% 22.7% 67.00 Low Inc 2.3% 2.8% 50.00 EastAsia 10.2% 9.4% 82.00 US 9.8% 15.6% 24.00 China 6.4% 5.6% 65.00 Japan 5.5% 5.0% 22.00 Germany 8.7% 7.5% 71.00 UK 4.4% 5.1% 53.00 Brazil 1.0% 0.8% 38.00 Russia 2.1% 1.3% 57.00 Mexico 1.8% 1.9% 61.00 Canada 3.1% 2.9% 73.00 Netherlands 3.7% 3.3% 125.00 Singapore 2.1% 1.9% 438.00 Saudi Arabia 1.4% 0.5% 87.00

The Basic Theory of Trade • Comparative advantage and the gains from

trade

• Trade as a means to economic efficiency

• Trade as a way of life

• Trade and economic interdependence

• Trade and economic growth

Early Thinking about Trade

• Mercantilism• Advocating exports and accumulation of gold and other

precious metals

• David Hume and the specie-flow mechanism• Accumulation of gold => domestic inflation => decline of

exports and increase in imports

• Adam Smith (1776)• Trade is beneficial for both trading partners (countries) if

each specializes in the production of the good he/she is more efficient in.