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Ch 16 - C h a p t e r 1 6 Tr a d i n g w i t h t h e W o r...

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C h a p t e r 1 6 : T r a d i n g w i t h t h e W o r l d I. Patterns and Trends in International Trade A. Imports are the good and services that we buy from people in other countries. Exports are the goods and services we sell to people in other countries. B. Trade in Goods 1. Manufactured goods represent 55 percent of U.S. imports and 68 percent of exports. 2. Raw materials and semi-manufactured materials represent 14 percent of U.S. exports and 15 percent of imports. 3. The largest export and import items are capital goods and automobiles. C. Trade in Services International trade in services such as travel, transportation, and insurance is large and growing. D. Geographical Patterns of International Trade 1. The United States trades with countries all over the world, but its biggest trading partner is Canada, which received 20 percent of all U.S. exports and accounted for 17 percent of all U.S. imports. 2. Japan is our second largest trading partner, receiving 8 percent of our total exports and providing 9 percent of our imports. E. Trends in the Volume of Trade 1. In 1960, the United States exported 3.5 percent of its total output and imported 4 percent of the goods and services that Americans bought. 2. In 2006, the United States exported 10 percent of its total output and imported 15 percent of the goods and services that Americans bought. F. Net Exports and International Borrowing 1. The value of exports minus imports is called net exports . 2. In 2006, imports exceeded exports in the United States, so net exports were negative . 3. When a country imports more than it exports, it must borrow from foreigners or sell some of its assets. 4. When a country exports more than it imports, it must make loans to foreigners or buy some of their assets. II. The Gains from International Trade A. Comparative advantage is the fundamental force that generates trade between nations. 1. The basis for comparative trade is divergent opportunity costs between countries. (These terms were defined and examined in Chapter 2.) 2. Nations can increase the consumption of goods and services when they focus on allocating resources to the production of those goods and services for which they have a comparative advantage. B. Opportunity Cost in Farmland 1. Figure 16.1 shows the production possibilities frontier for an imaginary country called Farmland and uses it to calculate Farmland’s opportunity cost of producing a car and its opportunity cost of producing 1,000 bushels of grain at point A .
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2. Without international trade, Farmland produces and consumes at point A , 15 billion bushels of grain and 8 million cars. At this point, the opportunity cost of a car is 9,000 bushels of grain, and the opportunity cost of 1,000 bushels of grain is 1/9 of 1 car. C. Opportunity Cost in Mobilia 1. Figure 16.2 shows the production possibilities frontier for another imaginary country called Mobilia and uses it to calculate Mobilia’s opportunity cost of producing a car and its opportunity cost of producing 1,000 bushels of grain at point A’ .
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