In chapter 1, we were introduced to the wealth of data relating to international
economics. In answering these questions, different people noticed different patterns in the
data. This underlines the reality that international trade is a complex phenomenon.
1. Explain why neighboring countries tend to trade extensively with each other.
The most obvious answer is transportation costs, both in money and in time. A firm will
buy components from the closer supplier rather than one farther away (given the same
quality of product) because transportation will likely be faster and less expensive. For
example, US automobile manufacturers buy more parts from Canada than from
Germany. Also, individuals in countries that share borders are probably more familiar
with each other’s business practices and customs, resulting in lower transactions costs.
2. Use the information in text Tables 1.4 and 1.5 and your knowledge of the Mexican
economy to summarize and explain the trade pattern of Mexico.
Mexico is a large, developing country, whose most important trading partner is the
United States. Because NAFTA provides Mexico with preferential access to U.S.
markets, we should expect Mexico to export products in high demand in the United
States. In addition, because Mexico has significant oil reserves, petroleum should be an
important export. From Table 1.4, we see that Mexico’s exports are dominated by
machines and transport equipment (e.g., motor vehicles, office machines and computers,
televisions), miscellaneous manufactures (including clothing), mineral fuels (especially
oil), basic manufactures (textiles, iron and steel) and agricultural products (fresh fruits
and vegetables), most destined for the U.S. market.
Petroleum accounted for about 11% of exports, down from 36% in the early 1990s. This
reliance on petroleum exports means Mexican income is critically dependent on oil prices
—and illustrates why growth in Mexico was very high in the 1970s when oil prices were
high, and also why income in the 1980s dropped (along with the price of oil). Mexico's
oil production peaked in 2003 and 2004, but has fallen since (The Economist, 12/22/'07,
Mexico’s imports are also widely distributed. Machinery and transport equipment are the
most important category of imports (49%), supplemented by large imports of basic
manufactures (16%), chemicals (10%), miscellaneous manufactures (12%), and food and
live animals (5%). This pattern of imports is consistent with a developing country trying
to establish a manufacturing and industrial base for its economy.