KW_Macro_Ch_18_Sec_01_Comparative_Advantage_and_International_Trade

KW_Macro_Ch_18_Sec_01_Comparative_Advantage_and_International_Trade

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>> International Trade Section 1: Comparative Advantage and International Trade chapter 18 The United States buys roses—and many other goods and services—from other countries. At the same time, it sells many goods and services to other countries. Goods and services purchased from abroad are imports; goods and services sold abroad are exports. Imports and exports have taken on an increasingly important role in the U.S. econ- omy. Over the last 40 years, both imports into the United States and exports from the United States have grown faster than the U.S. economy; panel (a) of Figure 18-1 shows how the values of imports and exports have grown as a percentage of gross domestic product. As panel (b) demonstrates, foreign trade is even more important for many other countries than for the United States. To understand why international trade occurs and why economists believe it is beneficial to the economy, we will first review the concept of comparative advantage. Goods and services purchased from other countries are imports; goods and services sold to other countries are exports.
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2 CHAPTER 18 SECTION 1: COMPARATIVE ADVANTAGE AND INTERNATIONAL TRADE Figure 18-1 U.S. Belgium Canada Germany France Mexico China Japan 90 80 70 60 50 40 30 20 10 Pe r cent of GDP Exports Imports 2000 ’03 1960 1970 1980 (a) U.S. Impo r ts and Expo r ts, 1960–2003 (b) Impo r ts and expo r ts fo r Diffe r ent Count r ies, 2002 1990 Yea r 16 14 12 10 8 6 4 2 Pe r cent of GDP Imports Exports The Growing Importance of International Trade Panel (a) illustrates the fact that over the past 40 years, the United States has exported a steadily growing share of its output (that is, its gross domestic product) to other coun- tries and imported a growing share of what it consumes from abroad. Panel (b) demonstrates that international trade is even more important to many other countries than it is to the United States. Source: U.S. Department of Commerce, National Income and Product Accounts [for panel (a)] and United Nations Human Development Report 2004 [for panel (b)].
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Production Possibilities and Comparative Advantage, Revisited To grow Valentine’s Day roses, any country must use resources—labor, energy, capital, and so on—that could have been used to produce other things. The potential production of other goods a country must forgo to produce a rose is the opportunity cost of that rose. It’s a lot easier to grow Valentine’s Day roses in Colombia, where the weather in January and February is nearly ideal, than it is in the United States. Conversely, other goods are not produced as easily in Colombia as in the United States. For example, Colombia doesn’t have the base of skilled workers and technological know-how that makes the United States so good at producing high-technology goods. So the oppor- tunity cost of a Valentine’s Day rose, in terms of other goods such as computers, is much less in Colombia than it is in the United States. And so we say that Colombia has a comparative advantage in producing roses. Let’s
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_18_Sec_01_Comparative_Advantage_and_International_Trade

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